Whilst the government remains keen to continue to incentivise UK companies to carry out research and development (‘R&D’), there has been a great deal of talk about the effectiveness of the R&D tax relief schemes currently offered to businesses.
WHAT’S HAPPENING?
At present, there are two regimes, one offered to small and medium enterprises (‘SMEs’) and a separate less generous scheme offered to large companies.
Following recent consultations with taxpayers, advisers and HMRC, the government believe that the large company scheme offers better ‘value for money’ than the SME scheme, generating a healthier return in terms of value generated through encouraging R&D. The Government has also reported less instances of abuse of the large company scheme when compared to the more generous SME regime.
Unsurprisingly perhaps, the positive press given to the large company scheme has been reflected in the Treasury announcing an increase in the rate of the large company R&D benefit, with a concurrent reduction in the benefit provided by the SME scheme. These changes will take place from 1 April 2023.
The next step now seems to be the potential harmonisation of the two schemes to create one ‘large company style’ regime. As such, HM Treasury have commenced a period of consultation, inviting stakeholders to contribute their thoughts.
The new single scheme has been publicised as being a measure to ‘simplify the R&D tax system in line with the Government’s overall plans for tax simplification’ stating that in actual fact ‘the UK is unusual in having two schemes’.
But what does this mean for existing R&D intensive companies, particularly SMEs who have, over the years, been significant beneficiaries of the cash benefits the scheme provides?
WHAT’S BEING CONSIDERED?
We look at some of the potential changes and questions the Consultation addresses:
- The new scheme is likely to provide an ‘above the tax line’ credit, which unlike the current SME scheme, would bolster a company’s pre-tax profits, providing income that is presented in the accounts on a similar basis to grants. This credit would be taxable and would align SMEs with large companies, who already disclose the taxable R&D credit above the line. The Government asks whether stakeholders agree with this proposal and if not, what alternatives they propose. Additionally, they ask whether this would impact a company’s budgeting decisions in respect of their R&D outlay. Our belief is that whilst the above the line accounting treatment can improve the reader’s perception of the profitability of the company, it is likely to be small, if any consolation to the downside SMEs will face in terms of a reduction in rates of relief (and cash incentives) this new scheme is likely to provide. We would welcome your views on this.
- The present schemes allow the inclusion of R&D supporting costs such as maintenance of equipment, finance and human resources. These costs have been allowed since 2009. However, the Consultation cites concern that the inclusion of these cost categories leads to complexities and boundary pushing. The Treasury asks the question as to whether the inclusion of these costs influences a company’s decision to undertake R&D. Reading between the lines this suggests the Treasury are thinking of disallowing these indirect costs going forwards. In our view, it is valid to allow companies to claim for finance time for managing R&D budgets or human resources to recruit R&D staff. Again, we would welcome your thoughts.
- Currently, there is a difference between the large company and SME scheme in respect of who can claim for subcontractor costs. Large companies are prevented for claiming for the costs of engaging subcontractors to carry out their R&D (subject to some exceptions). However, SMEs can include subcontractor costs in their claim (restricted to 65%). Furthermore, companies can claim the costs for R&D that is subcontracted to them (from large companies) under the large company scheme (but not under the more generous SME scheme). The harmonisation of the two schemes therefore puts these third-party costs under the spotlight, leading to the question of who should be able to claim relief. The Consultation therefore asks for comments on whether the customer or the subcontractor should be able to claim for relief going forwards, and the positive and negative impacts for businesses or sectors either way. This is currently a complex area to negotiate in respect of the present scheme and has led to debate with HMRC on many occasions. The simplification of these rules is welcome, and the fact that the Consultation is asking for views is positive.
The questions raised above are just a few being placed on the table. If you would like to read the full consultation, please click here.
What’s next?
The Consultation is open until 13 March 2023, following which the rules for the new single scheme are likely to be formed, with it potentially being in place by 1 April 2024. If you would like to discuss the implications of this new scheme or your thoughts on any of the points raised, please contact your normal contact in the CP Innovation Team.
With the UK Corporation Tax rate set to rise from 19% to 25% from 1 April 2023, it feels counter-intuitive that the UK Government is still ending the 130% Super Deduction (SD) Relief a day earlier.
Companies will now have less generous tax reliefs available to offset against increasing tax liabilities. Unless the Government heeds the advice from the Confederation of British Industry (CBI) by replacing/extending this relief (and past Chancellors do have a habit of pulling last minute rabbits out the hat come Budget time), then it’s vitally important for companies to maximise this relief before it’s too late.
Quick Recap: Super Deduction (SD)
The SD provides a 130% first-year allowance on qualifying ‘Main Rate Pool’ plant and machinery assets and a 50% first-year allowance on qualifying ‘Special Rate Pool’ assets. If it is not available, relief is reduced to the default writing down rates of 18% and 6% per annum.
So, what’s the big deal?
Without stating the obvious, companies can get an additional 30% of free relief from the government on their capital expenditure – and the relief is uncapped. Furthermore, the relief provides a substantial acceleration of savings in the first year.
For example, on a typical £10m office fit out project;
- Without the SD, the value of tax savings over the first two years would typically equate to £460,000;
- With the SD, this would increase almost 3x to c. £1,200,000
Beware, Beware
As with anything in tax, what may sound great as a headline tends to be punctuated by a number of conditions that can easily be overlooked or misunderstood. Companies take note of the following;
- It only applies to expenditure incurred between 1 April 2021 and 31 March 2023 AND
- Contracts with builders/suppliers have to be entered into after 3 March 2021.
- The expenditure must be on new and unused assets, so it’s not available for the purchase of second-hand assets.
- Assets are required to be legally owned during the 2-year window – this can be tricky to determine especially where deposits/stage payments have been incurred on qualifying items.
- Any subsequent sale of assets where the super deduction is claimed will be subject to a balancing charge equivalent to the amount of relief obtained. However, if it’s a sale of a fixture, the disposal value can be fixed via the usual s.198 tax election.
- For expenditure incurred within an accounting period that straddles 31 March 2023, the 130% rate is proportionately reduced for the number of days of the relevant period which falls outside the window. Here, there may even be a case for extending or shortening the accounting period to end on 31 March 2023 to ensure no reduction.
- Leased assets will typically be denied, unless providing a service more than mere hire.
Overall, it’s worth reviewing timelines of capex budgets to potentially bring forward costs, where possible, to maximise the SD before the deadline.
What About Other Tax Reliefs?
If the Super Deduction isn’t available, fear not as there are other reliefs including;
- Annual Investment Allowance – 100% deduction of qualifying items but capped to £1m.
- Research & Development Allowances – 100% deduction, uncapped, on capital expenditure where research and development activities are taking place. This relief is typically underutilised but can provide a huge cashflow boost.
- Capitalised Revenue Expenditure – 100% deduction on costs that have been capitalised but are revenue nature.
- 150% Land Remediation Relief – for both investors and developers on costs associated with removing contaminants to land and buildings.
- Normal capital allowances on historic or current construction expenditure – be it new build developments or refurbishments/fit outs of existing properties.
- Capital allowances on acquisitions of second-hand commercial buildings – by providing strategic advice at an early stage of a transaction, significant allowances could be unlocked and transferred/retained by the vendor or buyer. Beware of the 2-year time limit from the completion date to agree values.
There are plenty of tax reliefs available on capital expenditure works from the most generous at 150% all the way down to 3%. The key things to consider are timings, conditions and actual benefits realised.
At Cooper Parry, we can help you ensure all bases are covered and no stone is left unturned in the quest to maximise total tax relief for you. Get in touch with Ronak Shah, our Capital Allowances Director, at ronaks@cooperparry.com, or speak to him at our upcoming FD Spring Seminar ’23.
Haven’t signed up yet? Find out more here.
Seen the recent news about the multimillion-pound sale of Trunki? The makers of the children’s colourful ride-on suitcases. Given all the headlines we figure it’s a good time to revisit the chat we had with Rob Law from a few years back in 2020.
Having been rejected by the Dragons’ Den who described Trunki as a ‘worthless company’, Rob’s proven them wrong. Big time. With sales of over 5 million Trunki cases since his disastrous pitch in 2006, Rob went on to be one of the most successful entrepreneurs rejected by the Dragons. The company has won over 120 awards including The National Business Awards SME of the Year and Rob has received an MBE for Services to Business.
Rob spoke to us as part of a series of HUB CP online events put on during lockdown. He talks candidly about that Dragons’ Den experience. How you can overcome knock-backs, defy the odds in life and business and achieve unprecedented success, even when the odds are stacked against you.
We’ve selected some short snippets for you to enjoy below.
You can also view the full chat which is just under an hour long here
THE ONE ABOUT BEING IN THE DEN – 1M 34S
THE ONE ABOUT OVERCOMING CHALLENGES – 1m 17s
THE ONE ABOUT MINDSET – 1m 11s
KEEPING YOU UP TO DATE ON SUSTAINABILITY DEVELOPMENTS
Sustainability continues to be a hot topic. Governments around the world, including in the UK, are regularly introducing new legislation to address issues around climate change and sustainability. We’ll help you stay up-to-date on changes that could affect your business. And what action you need to take.
Streamlined Energy and Carbon Reporting (SECR)
SECR is a mandatory scheme that applies to large UK companies. Businesses within scope must collect information relating to their energy use and associated carbon emissions, then submit this as part of their annual reporting to Companies House.
The UK government is formally required to review SECR regulations within 5 years. This takes us to the 1st of April 2024. But the time may come sooner than we first thought. Due to a recent consultation, the changes may be upon us this year.
At the introduction of SECR, the government had not yet signed the legal commitment to be net zero by 2050, so an increase in stringency is very much expected.
To give you just a taste, potential changes could include but aren’t limited to:
- Listed/Unlisted large/LLPs are due to be held to the same requirements.
- There are fifteen scope 3 categories in total. At the moment, only ‘business travel’ is mandatory, but more may follow soon.
- If your reporting is done in-house, you’ll need mandatory verification from an external source.
- There’ll be more emphasis on meeting targets. You should gain more visibility over your carbon footprint, allowing reduction targets to be set – and smashed!
Here’s a helpful link, it’s worth a read.
Energy Savings Opportunity Scheme (ESOS)
ESOS is a mandatory energy assessment scheme for organisations in the UK that meet the qualification criteria. Organisations must notify the Environment Agency by a set deadline that they have complied with their ESOS obligations.
Your Phase 3 requirements were published in July 2021, with a compliance deadline of December 2023. A notable change is that it’s now a requirement for participants to set a target following the Phase 3 compliance deadline.
Phase 4, however, brings on some significant changes. The qualification date for Phase 4 is the 31st of December 2026, with a compliance date of a year later.
Mandatory inclusions are:
- Net zero assessments
- Changing balance sheet thresholds (these need to align with SECR)
- You’ll need to explain why a goal wasn’t achieved
- Reports must use ISO 50002 or EM 16247
Thanks to their strong credentials in the health & social care and technology sectors our Corporate Finance team has been involved with another major deal.
Signis Limited, which trades under the tri.x brand, has been sold by its parent company Antser Holdings advised by Cooper Parry. tri.x will be joining OneTouch to form a comprehensive healthtech and compliance group, backed by August Equity.
tri.x is the market leader in the provision of effective online adult and children’s social care policies and procedures solutions, supporting all Local Authorities across England. It has been part of Birmingham based Antser Group since it was acquired in 2019.
August is a long-term investor into the social care sector, with particular emphasis on businesses with technology-led applications; OneTouch and tri.x bring together two excellent businesses serving the social care commissioners and providers in delivering a high-quality service. Together they form a strong platform with highly complementary software and product offerings.
Richard Dooner, CEO of Antser Holdings, said:
“Cooper Parry helped us complete an attractive sale in a relatively short timeframe, given the requirement to carveout a retained business. The prior relationship Cooper Parry had with the buyer helped us to quickly build mutual trust that we had the best buyer and helped drive an efficient sale process.”
Andy Parker our Head of Corporate Finance said of the deal:
“With our focus on both healthcare and technology and following on from our recent sale of Nourish Care Systems to private equity, tri.X represented an exciting opportunity to use our market knowledge and deal-making skills. The team at Antser did a superb job supporting the transaction and committing to support the new business as it merges under August’s direction”
