InfoLab - Technology Matters Event R&D Tax Relief Seminar

1. InfoLab - Technology Matters EventR&D Tax Relief Seminar 5 September 2007 TAX

2. Agenda • Overview of the R&D Tax Relief Scheme • The Rules • Eligible Expenditure • Proposed Changes • The Definition of R&D for Tax Purposes • Making an R&D Tax Relief Claim • Questions – Open Forum

3. InfoLab - Technology Matters EventOverview of R&D Relief Scheme Anthony Cox 5 September 2007 TAX

4. What is R&D Tax Relief? • Company tax relief • Reduce a Company’s tax bill or provide a cash sum for SME’s • Tax incentive • Encourage greater R&D spending • Promote investment in innovation • UK Target 2.5% of GDP by 2014 (~75% increase on current levels)

5. Who can claim R&D Tax Relief? • Only Companies can claim • Excludes partnerships or local authorities • Relevant R&D • Expenditure must be incurred on R&D relevant to the trade of the company • Not Capital expenditure • Expenditure must be deductible in computing the profit for tax • Two Schemes • A small or medium company – SME scheme; or • Any company other than a SME - Large Company scheme

6. R&D Tax Relief Schemes R&D Allowances 100% in year of expenditure Capital Expenditure R&D Tax Relief 150% Super Deduction Undertake activities Qualifying as R&D for tax purposes SME* Potential for Revenue Expenditure Tax Credit 24% Payable Credit R&D Tax Relief 125% Super Deduction * By reference to Commission recommendation 96/280/EC or 2003/361/EC Large Company

7. R&D Tax Relief – The Rules

8. R&D Tax Relief – SME Illustration • SME R&D Scheme • No R&D Claim • Claim for R&D Tax Relief • Profit/(Loss) before tax • £500,000 • £500,000 • (£1,000,000) • R&D additional deduction • (£1m R&D spend x 50% uplift) • £Nil • (£500,000) • (£500,000) • Profits chargeable to tax • £500,000 • £0 • (£1,500,000) • Corporate tax at 30% • £150,000 • £0 • (£450,000) • (£285,000) • Corporate tax at 19% • £95,000 • £0 • Cash tax saving • By making an R&D claim based on £1m of qualifying R&D expenditure • £150,000 or £95,000 • (15% or 9.5%) • Payable credit – 24% of £1m • By surrendering £1.5m of qualifying losses (or 16% of £1.5m) • £240,000(1) 1: Capped by the PAYE and NIC liabilities for payment periods ending in the accounting period.

9. R&D Tax Relief – Eligible Expenditure • Staff Costs • Employees directly and actively engaged on R&D • Salaries, emoluments, secondary class 1 NIC’s, pension contributions • Externally Provided Workers • Contract staff provided by 3rd-party staff provider • Directly and actively engaged on R&D • Subject to the supervision, direction or control by the company performing the R&D • 65% of expenditure paid to staff provider or payment made to staff provider • Consumable Stores or Items • Materials consumed/transformed as part of the R&D process • Power, water, fuel used in directly carrying out the R&D • Computer software used directly in carrying out the R&D

10. Claim Time Limits 2006 Budget • Reduction in the time period for claiming R&D tax relief from: • 6 years → 2 years Effective for APE on or after 31 March 2006 Transitional rules apply for earlier periods: Earlier of: • Six years after the end of the relevant accounting period; AND • 31 March 2008 Opportunity to ‘enhance’ previous claims to claim the full extent of the relief available

11. Proposed Changes 2007 Budget Large Company Scheme Rate of relief to increase: 125% → 130% Expected in Finance Bill 2008 SME Scheme Rate of relief to increase: 150% → 175% Expected in Finance Bill 2008 - subject to EC state aid approval rules Extension of SME scheme to mid-sized companies: Employees: ≤ 250 → ≤500 T/O: ≤ €50m → ≤€100m Balance sheet total: ≤ €43 → ≤€86m Finance Bill 2007 – date TBC

12. The Value of R&D Tax Relief • Cash benefit – Cash saving and/or more to spend on R&D • Reduction in effective tax rate • Reduced net cost of R&D • Potential annuity - Cash tax benefit • Corporate Governance

13. InfoLab - Technology Matters EventThe Definition of R&D for Tax Purposes Rebecca Murdoch 5 September 2007 TAX

14. Who conducts R&D? Everyone’s first thought? Pure research or ‘Blue-sky’ development What about development? • Anycompany can conduct R&D for tax purposes • R&D is not limited to the R&D department

15. DTI Guidelines: Some Definitions “R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.” In the eyes of the DTI, R&D has a much wider definition and can cover a number of different activities.

16. Potentially Qualifying R&D – IT / Banking / FS sectors • Product Development • Fraud Detection:Algorithms for real-time fraud detection • Online Security:On-going work on improving online security and dealing with new security threats • ATM Mobile Phone Top-Up: Architecture for mobile phone top-up via ATM • Risk Modelling: Development of risk modelling and underwriting software including any work on implementing new algorithms • Risk Quantification: Development of solution to quantify risk based on factors such as: 1. Usage e.g., Pay-as-you-drive schemes or 2. Genetics/historical factors e.g., life insurance based on genetic make-up or family/medical history • Chip ‘n’ PIN: Development of contact-less Chip ‘n’ Pin solution, primarily around data authentication New characteristics or functionality • Legacy issues • Integration of new technology - new algorithms developed • Security software • Improved service quality • Connection reliability • Faster processing speeds • Legal/regulatory • Basel II

17. System Integration • Communication issues The satellites on earth operate at different frequencies to each other and fail to communicate. The satellites operate at the same frequency as each other for effective communication.

18. Data Processing Finance & Invoicing Client Services Mail In SCOPE DATABASE Client Reporting Packing Consumer Services Warehouse Stock Control Stock Reporting System Integration A SCOPe system uses a common platform and integrates each module around it. The modules are based upon the various functions of the business carried out by the company. Using this integrated system, communication between each module is effective and efficient.

19. FIELD TESTING / QUALIFICATION ITERATIVE PROCESS SYSTEM & DESIGN & DESIGN & WORKING COMPANY FEASIBILITY MODULE TEST OF TEST OF PROTOTYPE / REQUIREMENTS STUDY SPECIFICATION MODULES SYSTEM PILOT PLANT ITERATIVE PROCESS PRE - PRODUCTION INDIRECT ACTIVITIES RAISING FINANCE PROJECT DEVELOP / MODIFY PLANNING OF TRAINING PLANNING , RISK PATENT TOOLS FOR TEST RECRUITING PLANNING , APPLICATIONS PROJECT PROCEDURES ADMIN MANAGEMENT & PURCHASING CO - ORDINATION PAYROLL Where Does R&D Start? Not R&D until this point

20. Where Does R&D Finish? • Resolution of Uncertainty • “… when knowledge is codified in a (usable) form… or when a prototype or pilot plant with all the functional characteristics …is produced.” • May extend to production or use if Uncertainty Routine fault-fixing - Fine-tuning - Cosmetic / Aesthetic Maintenance NOT R&D

21. Abortive Projects • Intention to achieve an advance in science or technology • Insurmountable technical • or • commercial challenges • Completely or partially unresolved uncertainty • Incomplete achievement of project objectives Still R&D

22. InfoLab - Technology Matters EventMaking an R&D Tax Relief Claim Anthony Cox 5 September 2007 TAX

23. Making an R&D Tax Relief Claim • How can R&D tax credits be claimed? • Claimed in the company’s tax return at the end of the accounting period • Supported by a technical report to justify the claim • How are claims assessed? • Claims are assessed by HMRC tax inspectors • Either by R&D specialist offices, local inspectors, or Large Business Service • What information will be needed? • Nature of the R&D project and the scientific or technological uncertainties • Qualifying expenditure analysis

24. Why use KPMG? • Multi-disciplinary R&D Tax Relief Group • Engineers, scientists, software professionals with industry experience • Tax and accounting professionals • Former HMRC R&D principal technical specialist • Least intrusive approach • Minimise the time commitment of internal resources • Our success and established track record • End-to-end support: technical interviews → negotiation & agreement with HMRC • Fees • Potential to charge contingent fees for our services • Our legacy • Imparted knowledge of the R&D tax relief scheme • Ability to identify and capture qualifying projects in the future

25. INPUT OUTPUT Assessment of activities Document eligible activities Compilation of information into claim Information Agreed Claims Meetings with key R&D and finance personnel Planning meeting R&D activities R&D expenditure Capture qualifying costs Design methodology to quantify claim Possible automation of data capture Possible discussions HMRC KPMG approach - Process map

26. Summary R&D for Tax Purposes • Advance sought in science or technology - New or appreciably improved – addition of knowledge to industry • Resolution of scientific or technological uncertainty - Technical challenges – not readily deducible 3. Application is wider than you think Claim Periods 01 April 2002 – onwards for large companies (01 April 2000 for SMEs) Claim Deadline 31 March 2008 – Just over 6 months to go! DON’T MISS OUT!

27. Questions Any Questions?

28. Rebecca Murdoch Tax Consultant Tel: 01772 473610 Email: rebecca.murdoch@kpmg.co.uk Anthony Cox Tax Senior Manager Tel: 01772 473671 Email: anthony.cox@kpmg.co.uk Contacts