SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor industry’ brandline are trademarks of SMMT Ltd R&D Tax Credits – How to benefit from the latest initiative Yung Tran, Head of Member Services and Business Improvement, SMMT Robert Baker, Chief Economist, SMMT Diarmuid MacDougall, Partner, PwC 18 April 2013
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R&D Tax Credits How to benefit from the latest initiative...• “R&D for tax purposes takes place when a project seeks to achieve an advance in overall knowledge or capability in
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SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor
industry’ brandline are trademarks of SMMT Ltd
R&D Tax Credits –
How to benefit from the latest initiative
Yung Tran, Head of Member Services and Business Improvement, SMMT
Robert Baker, Chief Economist, SMMT
Diarmuid MacDougall, Partner, PwC
18 April 2013
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 2
• During presentations (10:30 – 11:00) everyone will be muted so that only
the presenters will be heard.
• The presentation will be followed by a Q&A session. Click on the hand
symbol to show that you have a question.
• If you are experiencing any technical problems please call 0207 344
1611 or 07793 773391
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 3
Robert Baker
Chief Economist
SMMT
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor
industry’ brandline are trademarks of SMMT Ltd
UK Budget 2013 – banking on firmer GDP growth ahead
• It wasn’t planned to be this way – rewind to Budget 2008
• Recovery drags; fiscal consolidation relaxed and rejigged
• Public finances weaker than expected at June 2010; so higher
borrowing, for longer and spending ‘shifted’ around
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 5
On the UK’s Budget plans 2008 and 2013 (1)
Budget 2008 Budget 2013 Budget 2013
£bn 2012/13F 2012/13P 2016/17F
Current Receipts 721 589 694
Current Spending 680 657 704
Current Balance 18 (93) (35)
Net Investment 41 28* 32*
Public Sector Net Borrowing (23) (121)* (67)*
Cash Value UK GDP 1,841 1,526 1,806
Gross Stock Public Debt 731 1,189 1,580
* Adjusted for capital receipts from Royal Mail, APF & 4G which reduce net investment to £-6bn in 2012/13
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 6
On the UK’s Budget plans 2008 and 2013 (2)
The UK & Europe public finances – deficits and debt
2013
Budget 2008 Budget 2013 Budget 2013
as a percentage of UK GDP 2012/13F 2012/13P 2016/17F
Current Balance 1.0% (6.1%) (1.9%)
Public Sector Net Borrowing 1.2% 7.9% 3.7%
Gross Stock Public Debt 39.7% 77.9% 87.5%
General Government as percent of GDP UK Germany Euro Zone
net borrowing 7.6% 0.2% 2.8%
net debt 93.9% 80.7% 95.1% Maastricht Treaty deficit and debt basis – Mar 2013 OBR EFO
SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 7
Fiscal consolidation by 2017/18 and fiscal priorities
• Planned tax rises 80% complete by 2012/13; 80% of cuts to day-to-day spending and 70% of benefits to come
• To date the key fiscal priorities under the Coalition are:
1 taking the Personal Tax Allowance to £10K in 2014/15
2 Corporation Tax rate 20% for all businesses – 2015/16
3 Fuel Duty increases postponed & cancelled – for now
= IFS estimates the total cost to be £24bn by 2016/17
• Rebalancing policies, like the reformed Large Firm R&D Tax Credit Regime are slow-burners; key incentives to aid economy-wide shift to investment & exports. In time this should work. But the immediate focus is on housing again with major aid guarantees in First & Help to Buy Schemes
R&D Credits
Diarmuid MacDougall
• www.pwc.co.uk
PwC
Agenda • What is R&D?
• R&D tax relief schemes
• Small & Medium sized Enterprises (SMEs)
• Large company scheme
• Capital expenditure
• Qualifying costs
• Claim Methods
• The new ‘Above The Line’ R&D Expenditure Credit
Slide 9
PwC
What is qualifying R&D?
Slide 10 18 April 2013 SMMT R&D Webinar
PwC
What is qualifying R&D?
• “R&D for tax purposes takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. The activities that directly contribute to achieving this advance through the resolution of scientific or technological uncertainty are R&D.”
• When a product or process is introduced or changed and, for technological reasons, it is necessary to “try it out” to see if it worked then it is likely R&D has been performed.
• Overall knowledge can still be advanced where it is known that an advance has been achieved but the details of how are not readily available
• An advance may seek to extend the overall knowledge, duplicate an existing technology in a fundamentally different manner or make an appreciable improvement to an existing technology.
• An appreciable improvement should be more than minor or routine upgrading and should represent something that a competent professional user working in the field would consider to be genuine and non-trivial.
Slide 11 18 April 2013 SMMT R&D Webinar
PwC
What is qualifying R&D?
Examples include:
• Efforts to design and make components to more demanding tolerances or to perform in more demanding conditions – e.g. whether it is possible to machine at the higher tolerances within acceptable distortion levels caused by clamping forces and release, work with foundries to change casting methods etc. Technical challenge caused by design modification to rotate at faster rpm, withstand greater operating temperatures etc
• Design uncertainty caused by system impact of changes in dimensions, power, weight etc – such as effect on design of crash zones in a vehicle, impact on seal performance caused by aerodynamic changes resulting in greater pressure differences over door/window areas etc
Indications of uncertainty
• Need to model solution, build prototypes and perform substantial testing
• Failures, modifications, redesign – an iterative design process
• Contingency/plan for technical risk
Slide 12 18 April 2013 SMMT R&D Webinar
PwC April 2013
Strictly private and confidential
R&D Tax Relief Schemes
PwC
What is a SME?
– Less than 500 employees
• and
– either annual turnover €100m or balance sheet €86m
– There is a year of grace if these limits are breached
•Numbers include those of investors:
– 100% if investor controls company
– Proportion if between 25% and 50% investment (but certain
investors disregarded – VCs, universities, business angels,
institutional investors)
Slide 14
Section 2 - Overview of R&D tax reliefs
PwC
Small or Medium Enterprises
(SMEs)
Unfunded / internal R&D Funded R&D
Internal cost e.g.
employees
External cost
e.g. payments to
subcontractors
Policy objective: to address difficulties in raising funds
Slide 15
PwC
SME: What is the benefit
Reduced Taxable profit
Surrenderable loss
OR
From
April
2011
From April 2012
From April 2013
From April 2011
From April 2012
From April 2013
Qualifying R&D £1m £1m £1m Qualifying R&D £1m £1m £1m
Extra 100%/125% £1m £1.25m £1.25m Extra 100%/125% £1m £1.25m £1.25m
Tax saved on extra at 26%/24%/23% £260k £300k £287.5k
Potential loss to surrender
£2m £2.25m £2.25m
Tax saved on R&D expenditure 26%/24%/23% £260k £240k £230k
Total £520k £540k £517.5k Cash credit on surrendered loss * 12.5%/11% £250k £247.5k £247.5k
* Surrender is restricted to company PAYE & NI for periods ending on or before 31/3/12, unlimited thereafter
Slide 16
PwC
Large company scheme
Unfunded / internal R&D Funded R&D
Internal cost
e.g. employees
External cost*
e.g. payments to
subcontractors
*with limited exceptions (e.g. payments to universities)
Policy objective - to increase investment in R&D to drive up productivity
Slide 17
PwC
forward indefinitely
Section 2 - Overview of R&D tax reliefs
Large company scheme: What is
the benefit?
Slide 18
Currently c7% cash value but falling to 6% as Corporation Tax (CT) rate drops to 20%.
No ability to surrender losses for repayment
Qualifying R&D £1m
Extra 30% £300k
The extra deduction will result in:
Tax saved @ 23% (FY13) £69k
Tax saved @ 20% (FY15) £60k
PwC
RDAs
• 100% tax depreciation (other than land).
• Covers expenditure both on carrying out R&D and on providing
R&D facilities (e.g. buildings).
• Expenditure should be allocated to R&D activities on a just and
reasonable basis, e.g. through a proportion of floor space or
headcount.
• There is a two year time limit for claiming RDAs.
Slide 19 18 April 2013
PwC
Which costs qualify for R&D relief?
Slide 20 18 April 2013 SMMT R&D Webinar
PwC
Section 2 - Overview of R&D tax reliefs
What is qualifying expenditure?
• STAFFING COSTS
• The following costs qualify for staff involved in qualifying R&D activity
• Salaries, wages, bonuses etc
• Employer’s Class 1 NIC
• Employer’s payments to pension funds
• Reimbursed expenses
• But not
• Benefits, Class 1A, 1B NIC on benefits
• EXTERNALLY PROVIDED WORKERS
• In some instances payments to agencies/group employment companies for staff may qualify (please
• see below)
• SUBCONTRACT
• SME – 65% of subcontractor payments
• Large – payments to qualifying bodies only (100%)
• CONSUMABLE OR TRANSFORMABLE
MATERIALS
• Expenditure on materials and equipment used up
in the R&D activity
• Power, water and software used in R&D
• But not
• Supplies used indirectly e.g. overheads, insurance
etc
• Rent, rates, interest or lease payments
• Capital items or depreciation
CONTRIBUTION TO INDEPENDENT R&D
• In some instances payments to qualifying bodies
or contributions to independent R&D may qualify
Slide 21
PwC
Calculation methods
Slide 22 18 April 2013 SMMT R&D Webinar
PwC
Project Cost
(£’000)
R&D
activity
Qualifying cost
(£’000)
1 300 300
2 250 0
3 150 90
4 50 50
750 440
100%
0%
60%
100%
Weighted average project percentage
R&D% = 440 = 58.7% Qualifying staff cost = 58.7% x staff cost 750
Slide 23 18 April 2013 SMMT R&D Webinar
PwC
Function area percentages
R&D Tax Relief 24 April 2012
% qualifying
activities
Departments
AE BE CE DE EE HY PT Testing
New models 80% 95% 54% 95%
Significant upgrades 50% 100% 30% 100%
Minor upgrades 60% 100% 10% 100%
Other 75% 95% 40% 100%
Overall function % 95% 20% 100% 100%
PwC
Population average R&D content
claim
Spend £’m
Total spend 100 400 100 600
Average R&D % 40% 60% 80%
Qualifying Spend 40 240 80 360
40 60 80
Slide 25 18 April 2013 SMMT R&D Webinar
R&D %
PwC
The New R&D Expenditure Credit (“RDEC”)
Slide 26 18 April 2013 SMMT R&D Webinar
PwC
Overview of the new R&D
Expenditure Credit – A new 10% R&D credit (RDEC) is
available on expenditure incurred from 1 April 2013. It is taxable, so generates an 8% cash saving.
– It is like a grant, reducing the cost of R&D, unlike the current scheme which is tax. As R&D budget holders get the benefit in the numbers they are responsible for it should have more effect on investment decisions.
– It is given to large companies and SMEs claiming under the large company scheme.
– Companies initially have the option to elect for the RDEC or continue to claim the current super-deduction.
– For periods beginning on or after 1 April 2016, the super-deduction scheme is withdrawn and only the RDEC is available.
Slide 27 18 April 2013 SMMT R&D Webinar
PwC
Overview of the new RDEC £10m R&D spend ‘Super
Deduction’ £’000
RDEC
£’000
RDEC Losses b/f
P&L Profit before tax (PBT) 15,000 16,000 16,000
Tax charge (see below) (2,400) (3,200) -
12,600 12,800 16,000
Tax Computation PBT 15,000 16,000 16,000
R&D deduction/losses b/f (3,000) - (16,000)
Taxable profit 12,000 16,000 -
Tax charge at 20% tax rate 2,400 3,200 -
Balance Sheet Tax Payable 2,400 3,200 -
R&D Credit (less withholding) (1,000) (800)
2,200 (800)
Slide 28 18 April 2013 SMMT R&D Webinar
PwC
RDEC issues
• There is now a rate differential between the current super deduction (effective 6% cash tax
benefit) and the RDEC (effective 8% cash tax benefit).
• However, for contracts which are priced based on cost, there is a risk that the credit will be
clawed back, as the RDEC effectively reduces the cost of carrying out R&D work.
• Consideration of timing for electing into RDEC pre-April 2016. It is possible to elect into
the RDEC within two years, however the impact on the figures included in the accounts
should be considered. Once the election is made it is not possible to return to the super-
deduction scheme.
• Transfer pricing arrangements may need to be amended. Thought should be given to
whether the credit reduces the cost of R&D which is recharged (and whether the cost
marked up is net or gross of the credit).
• Impact on company bonuses (if determined by PBT) etc.
• Impact on effective tax rate and foreign tax credit available in parent territory for
subsidiaries of foreign multinationals.
Slide 29 18 April 2013 SMMT R&D Webinar
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