R&D tax reliefs: Not just lab coats and microscopes! Guang Deng R&D Tax Manager Leyton UK

1. R&D tax reliefs: Not just lab coats and microscopes! Guang Deng R&D Tax Manager Leyton UK

2. Contents • UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • Patent Box • Appendix

3. CCH has partnered with Leyton UK to provide a Research and Development service for clients Leyton has over 530 advisers specialised in their field – including engineers, scientists and IT/software experts Further information: CCH advice lines 0844 5618100 taxadvice@wolterskluwer.co.uk CCH and Leyton

4. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit

5. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • Expenditure based tax incentive • Super deduction • The uplift • Enhance tax deductible expenditure against taxable profit • SME vs large company • Resulting tax benefits vary depending on company tax position

6. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • An example of comparison • Figures shown are shown for illustration purposes • * Tax Rate may vary according to company tax position • * Calculated as 12.5% of the 200% Enhanced Expenditure

7. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit

8. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • The Payable Tax Credit is only available to SMEs • Tax loss-making position • Losses can be surrendered in return for cash due from HMRC • Tax credit is capped by the company’s PAYE & NIC contributions paid (abolished 1April 2012, subject to state aid approval) • Are large company losing out?

9. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • The Above the Line (ATL) tax credit – 9.1% return (before tax) • Visibility and signal to international investors • Large companies better off, compared to now • Effective from 1 April 2013 • Stage 2 consultation • Accounting and tax impact

10. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • R&D definition – unchanged for tax purposes • BIS Guidelines: • Scientific or technological advance • An advance in a overall knowledge or capability in a field of science or technology • Includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible • Scientific or technological uncertainties • Whether something is scientifically possible or technologically feasible, or • How to achieve it in practice, is not readily available or deducible by a competent professional working in the field • Systematic, Investigative or Experimental activities • Not accidental discovery • Logical, planned approach to undertake the R&D activities • The timeline should highlight the design alternatives and the analysis or tests done to select between alternatives

11. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit • Examples of eligibility during a new product development process

12. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit

13. Patent Box

14. Patent Box • Revenue based tax incentive • 10% tax rate • Effective from 1 April 2013 • Qualifying conditions • Company • Intellectual properties (IP) • Income • Profit • What it means to UK companies • Single entity vs groups • Patent or not • Define responsibilities • Apportionment methodology

15. Appendix

16. Appendix: Industry Examples • Manufacturing and Mechanical Engineering Eligible activities for R&D tax relief: • Design and development of a new cutting or forming machine prototype offering functionalities that are not straightforward to achieve • Behaviour analysis of newly developed materials under high thermal/vibration/pressure stress conditions or new/novel analysis of existing materials • Non-straightforward adaptation of existing products to meet changing government or industry environmental or safety standards • Development of a unique manufacturing process to increase precision or efficiency • Significant reduction of waste through process and machinery innovation Not eligible: • Minor adaptations to a manufacturing process or mechanical product – e.g. trivial calibration of a sensor or a simple aluminium plate design based on previous products • Expansion of a production line that only involves replication rather than innovative improvements

17. Appendix: Industry Examples • Software and Systems Engineering Eligible activities for R&D tax relief: • Development of a complex web based material database management system to improve information speed and security while tracking plant operations and customer product deployment • Design of a production system combining electronic sensors/controllers and mechanical elements (valves, heating elements, vacuums, etc.) in a novel way • Developing complex automated scripting to improve manufacturability analysis, e.g. verifying a PCB design meets both the electrical and manufacturing constraints • Implementing a complex power reduction/management system as a green industry initiative • Integration of complex manufacturing processes into one fully automated process by combining multiple user controls or PLCs into one software control centre Not eligible: • Routine deployment of a standard software process tracking tool • Website design and development (use of standard PHP, Javascript and so on) • Straightforward automation of a previously manual process