The research and development (R&D) tax relief schemes have been a big benefit for many UK businesses, although the benefits remain under-claimed. The scope of the regime covers companies in all business sectors and therefore recent changes, which affect claims currently being prepared, will have wide-ranging effect. Let’s deal with the good bit first.
The government wishes to strengthen the impact of R&D tax relief by providing smaller companies (who meet certain criteria) with certainty and guidance through an advance assurance (AA) scheme, which was launched by HMRC on 30 November 2015.
AA is a voluntary, non-statutory arrangement, designed to allow companies to provide HMRC with details of the R&D ahead of making formal claims. HMRC will then provide an opinion on the company’s eligibility and, if accepted, the assurance can last up to three years.
Now the bad news.
The rules setting out when expenditure on consumable items qualifies for R&D tax relief have changed from 1 April 2015 and this affects claims for accounting periods ended after that date; eg 31 December 2015. The changes limit the amount of relief available for consumable materials which are sold on to a customer, eg as part of a bespoke product or design. In summary:
- where a company sells or otherwise transfers ownership of items produced in the course of its R&D activity as part of its ordinary business, then the cost of consumable items that form part of those products is excluded from expenditure qualifying for relief; and
- where a company undertakes R&D on a production process, and consumable items form part of an item that is produced in that production process, and those items are sold or transferred as part of the company’s ordinary business, then the cost of consumable items that form part of the sold item are not allowable as qualifying R&D expenditure.
In particular, these new restrictions will affect many large projects (eg in construction) carried out on behalf of third parties.
Changes to reporting requirements
The European Union (EU) state aid transparency rules came into effect on 1 July 2016 and a form detailing the information set out below must be submitted to HMRC for SME R&D claims where the enhanced deduction for a particular claim has a tax effect of greater than €500,000, or where the payable credit is greater than €500,000.
HMRC has advised that it will not process R&D claims without the following information, which will be formally published by HMRC in due course.
- Company name.
- Company unique tax reference number.
- Company VAT number.
- Business sector (SIC code).
- Nominal amount of award (R&D enhanced expenditure x corporate tax rate or the amount of repayment).
- Date of claim.
The timing and format of publication is yet to be announced.
Universities and charities
With effect from 1 August 2015, the government has corrected an anomaly in R&D tax credits legislation, so that universities and charities are no longer able to claim the R&D expenditure credit (RDEC).
Universities and charities can, however, continue to make claims for expenditure incurred up to 1 August 2015.
How can RSM help?
RSM can help you navigate your way round these new rules, allowing you to optimise claims and providing clarity on your current position .
For more information, please contact Sheetal Sanghvi your usual RSM advisor.