Chapter 17 Research and development expenditure Flashcards
17.2 Definition of R+D
Research and development is aimed at projects that seek to research or develop advancements in science and technology.
17.3 Relief for small and medium sized companies
Claim 130% of the costs of qualifying expenditure. The company can just claim for 230% of the expenditure to be deducted in arriving at the adjusted profits for tax purposes.
To qualify as an SME you must have fewer than 500 employees and either annual turnover not exceeding 100 million euros or an annual balance sheet figure not exceeding 86 million euros. Where an enterprise is linked, the limits are compared to the total for all of the linked enterprises. Linked enterprises are those with control over the other, 50% of the voting rights.
17.5 Qualifying R&D
The expenditure must:
• Be revenue not capital in nature
• Must be related to a trade carried on or carried on by the company
It must be incurred on:
• Staff costs
• Software or consumables
• Relevant payments to the subjects of clinical trials
• Subcontracted R+D costs, or
• Externally provided workers
It must not be incurred in the carrying on of activities which are contracted out to the company by any person and must not be subsidized.
17.6 Staff costs
This includes all earnings paid to directors or employees other than benefits in kind, secondary class 1 NICs paid by the company and contributions to pension funds by the company. The staff must be directly and actively involved with the project, if they are partly involved, an apportionment is taken. Costs to staff who merely provide support (secretarial) to those involved in the project are excluded. However if staff are directly involved in qualifying indirect activities which are specifically identifiable as part of the project, the costs are included.
17.7 Software
Qualifying expenditure is that which is incurred on software that is employed directly in carrying out R+D. The cost of software used indirectly is not included. Where only part of the cost incurred relates directly to R+D, a proportion of the cost will be allowable.
17.8 Consumable or transformable items
Qualifying expenditure is that which is incurred on revenue items directly employed in R+D. this includes consumable items lime water and power. Relief is only available if items fully used up pr expended by the R+D activity itself. Where the R+D activity results in goods and services which are sold as part of the company’s normal trade, R+D relief will not be available for the costs of consumable items reflected in those goods or services.
17.10 R+D tax credits
There is further relief which allows SMEs with trading losses to surrender part of that loss to the government in return for a refund. The surrenderable amount is the lower of the unrelieved trading loss or 230% of the qualifying R+D expenditure. Unrelieved trading loss is any loss as increased by any additional R+D relief claimed but reduced by any actual or potential claims for relief that loss in the current period and any other actual loss relief claims in respect of the loss.
Once the loss has been surrendered the amount of credit given is 14.5% of the surrenderable loss for the period.
17.11 Large companies
The RDEC is given for large companies as relief, must be claimed within 2 years. The RDEC is treated as a taxable receipt in calculating the profits of the trade for the period. The company will also receive a credit against its tax liability of the same amount, the credit is equal to 13% of the qualifying expenditure.
If there is insufficient CT liability to fully deduct the RDEC, the company may receive a cash repayment from HMRC. The repayment will be the lower of:
• RDEC remaining after offsetting as much as possible against the CT liability
• RDEC – (RDEC x 0.19%), called the net value
• PAYE and class 1 NICs liability relating to the R+D staff
If following the cash repayment, there is still some RDEC left, it is carried forward to the next accounting period.
17.12 Election for special treatment of profits from patents (patent box)
A company may elect that any relevant intellectual property profits related to a trade of the company for an accounting period for which it is a qualifying company, are effectively chargeable at a lower rate of corporation tax. A qualifying company is one which at any time in the accounting period holds any qualifying IP rights.
Qualifying IP included patents granted in the UK or Europe. It applies to both new and existing IP and acquired IP if the company has further developed the IP. The relief is given by allowing a deduction to be made in calculating the trade profits for the period as follows:
Relevant IP profits x( (main rate of CT – IP rate of CT)/main rate of CT)
The IP rate is 10%. In FY2020, this gives a deduction of 47.4% of the relevant IP profits. If you tax the remaining 52.6% of the relevant IP profits at the main rate of 19%, this would give an effective rate of 10%.
Calculating relevant IP profits (RIPPs) –
• Create two streams for profits, the relevant IP income and the standard income stream. The RIPI is divided into sub-streams relating to individual IP rights and products, costs are allocated on a reasonable basis to the streams
• For each RIPR sub-stream calculate the profit attributable to that patent by deducting a notional return of 10% of the costs allocated to the patent business and a notional marketing royalty determined on an arm’s length basis as a percentage of RIPI. Then apply the R+D fraction to the profit calculated (see note below)
• Add the result for each sub-stream to give the total profits from patents
• Calculate the deduction from trading profits by applying the formula (RP x ((MR-IPR)/MR))
• Deduct the result from trading profits and then tax the taxable total profits at the main rate of CT
The R+D fraction – based on the amount of qualifying in-house R+D expenditure incurred by the patent box company on that particular patent plus third-party subcontracted R+D, relative to overall R+D expenditure and any relevant IP acquisition costs. The R+D fraction is the lower of:
• 1
• (D+S) x 1.3/ (D+S+A+SS), where
D = inhouse direct expenditure on R+D, S = expenditure on R+D subcontracted to third parties, A = expenditure on purchase of IP, SS = expenditure subcontracted to connected parties
Expenditure is calculated on a cumulative basis (total R+D spend to date). The R+D fraction will be 1 and patent box deductions unrestricted if there are no acquisition costs and all the R+D is undertaken within the company or by third party subcontractors.
