There were a few changes to R&D tax reliefs either announced or confirmed in last month’s Budget.
Firstly, the good news!
- The increase in rates of R&D relief was confirmed – for SMEs, the additional deduction increases from 125% to 130% of qualifying expenditure from 1 April 2015. The additional deduction under the Large company scheme remains at 30% of qualifying expenditure; however the R& D Expenditure Credit (also available for large companies) increases from 10% to 11%. We are seeing more companies who have to make claims under the Large company scheme (for example because they receive subsidies for their R&D projects) choosing to claim under the RDEC scheme rather than the Large company scheme as this tends to be more beneficial. It is worth noting that the rate of repayable SME credits increased from 11% to 14.5% of losses surrendered from 1 April 2014.
- HMRC also announced further details on the Advanced Assurance process for SMEs making their first R&D claim. This is to operate from Autumn 2015 and will give SMEs certainty over the validity of their R&D position for 3 years (provided their activities stay the same). More information on how this operates is to be released over the summer.
The not-so-good news!
In and amongst this good news was a restriction on the ability to claim certain consumable items, also from 1 April 2015. Consumable items are currently eligible for relief under the R&D scheme; consumable items are defined as consumable or transformable materials i.e. light, heat, power – and this is interpreted as anything which is transformed or consumed (‘used up’) in the R&D process. This is to be restricted so that consumable items are not eligible for relief where they form part of the product of R&D which is sold as part of the company’s ordinary course of business.
In other words – where a company undertakes R&D which generates a product which is sold to a customer, then the costs of the consumable and transformable materials within that product at the time it is sold are not eligible.
This is also the case when the R&D relates to a new process – if a product is created through the use of the process which is itself subject to an R&D claim, then the costs of the consumable and transformable materials reflected in that product are not qualifying expenditure.
Only the cost of consumable or transformable items fully used up or expended in the R&D activity itself, and which are not sold as part of a commercial product, will be eligible going forward. If not all the product made as a result of the R&D process is sold/transferred to a customer, then an apportionment needs to be made to split the eligible consumable items from those which form part of the product sold/transferred, from those which are not sold/transferred.
The purpose of this change is to ensure that companies adhere more closely to the R&D guidelines which prohibit the claiming of production costs. Going forward, where R&D takes place in conjunction with commercial production, there will need to be a careful review of the consumable and transformable items to determine the value of these which form part of the commercial product sold to the customer.
Despite this narrowing of the definition of qualifying costs, R&D claims remain enormously valuable to many of our clients; if you feel that your company undertakes any form of innovation, then please get in touch so we can explore this with you.
