Autumn Budget 2021 – Overview

Future Plans for the R&D Scheme

During the Autumn Budget 2021, the government announced a number of proposed reforms to the R&D incentive, all with the key focus of further supporting innovation within the UK, whilst also targeting abuse and improving compliance. These reforms are intended to be included within the Finance Bill 2022-23, meaning they will likely take effect from April 2023.

Amendments to R&D Scheme to Extend and Further Support Innovation Within the UK

An area that has been widely discussed for change is the inclusion of data and cloud computing costs. There has long been an intention to align the scheme and its guidelines to accommodate and recognise the latest technology, incentivising modern methods of processing and analysing vast data sets essential for R&D. 

As such, the government confirmed that under the proposed changes, both the SME and RDEC relief will be extended to include these data and cloud computing costs. Specifically, license payments for datasets and cloud computing costs attributable to computation and data processing will be brought into the scope of qualifying expenditure for R&D.

HMRC also intend to further refocus the relief towards innovation within the UK. Under the current rules of the incentive, a company can recover costs for a subcontractor irrespective of whether the work is conducted in the UK or overseas. The proposed changes indicate that, where a company subcontracts the work to an external party, relief will only be eligible where the work has been performed in the UK. Similarly, only the costs on Externally Provided Workers (EPWs, or agency staff) that are paid through UK payroll will be recoverable. These principles are to be reviewed before any exact legislation takes effect (from April 2023).

Abuse and Compliance

This is a really key area of the reforms and could impact how R&D is claimed for in the future. It follows HMRC’s intention to cut down the estimated level of error and fraud in R&D applications, and as a result, ensure that the relief is only received by those with a genuine entitlement to it.

HMRC has already acted on this issue, allocating additional resource to the compliance of R&D applications. The further suggested changes will see all claims for R&D relief to be made digitally (both for a reduction in Corporation Tax payable and a tax credit), and will require far more detail on the application. This will involve greater depth on why a project meets the relevant criteria from HMRC (seeking an advance in science and technology through the resolution of technological uncertainty) and what expenditure is being claimed. 

Companies will also be expected to inform HMRC of their intention to make a claim in advance. Further, HMRC will require each claim to be endorsed by a named senior officer of the company and will need applications to provide details of any agent who has supported compiling the application.

These changes further highlight the importance of using a reputable R&D provider with a proven track record; reputable providers will already be meeting much or all of this criteria, by compiling a robust application that explains to HMRC why your business and your activities qualify for R&D relief. Whilst these changes are not set to be implemented immediately, it is worth having a discussion with an R&D expert to ensure your company is set up and ready for any changes to the R&D incentive. 

Apogee Associates R&D Tax Credits

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Be Rewarded for Your Lockdown Innovations

Problems Ideas Solutions

2020 was an incredibly difficult year for all; the social and economic impacts of COVID-19 and lockdown restrictions have been significant for many individuals and business. However, amongst these challenging conditions, there have been incredible success stories of companies who have reacted to this environment and have been able to adapt and thrive.

For some business owners, the lockdown served as an opportunity to step back from the daily operations of the business and allowed more time to focus on innovation; we have seen the development of new products and service offerings as well as the modification and upgrade of existing ones. Conversely, some companies were forced to reinvent their business, with existing offerings and processes rendered unfeasible during lockdown. For example, many businesses in the exhibitions and events industry pivoted with great success! Whilst lots of business owners do not realise it, this period of adaptation and innovation has inadvertently seen significant amounts of Research and Development (R&D) being undertaken.

R&D Tax Relief is a generous government-ran incentive that allows companies to be rewarded for these innovative activities, through either a Corporation Tax reduction, refund or cash credit. Essentially, the incentive allows companies to receive between 19-33% of the funds that they have incurred on R&D expenditure (and can be recovered up to two years retrospectively).

Apogee have been in the fortunate position to be able to support companies with their applications for R&D Tax relief, helping businesses gain access to what can often be vital funding. This has helped support companies through this difficult economic climate whilst also enabling them to continue investing in innovative R&D activities.

There are a wide range of activities that companies have undertaken in the past year. The below serves as some brief examples of activities undertaken during “lockdown” that could qualify for R&D Tax Relief, but are no means exhaustive:

  • The development of bespoke IT systems and software, to allow to company to move from an office based to a more remote and virtual working environment.
  • The development of new products aimed to help to tackle and mitigate the risks of COVID-19 i.e. facemasks, PPE and remote hand wash stations.
  • The modification of existing products in order to comply with new guidance e.g. adding antibacterial properties or the production of protective screening.
  • Companies who have pivoted operations/offering to develop new products e.g. a gin company who pivoted to the development of hand sanitiser.
  • The conceptualisation and redesign of processes and systems to accommodate new guidance e.g. social distancing, whilst maximises efficiency of operations.
  • The development of automated processes to account for the reduced number of staff able to attend and work on-site.
  • Design and development of online platforms and portals to allow companies to operate entirely online e.g. the integration of sales/accounting/CRM systems, or the development of bespoke ordering/booking systems.

The team at Apogee would welcome the opportunity to learn more about the innovative activities that companies have undertaken and to guide you through how these activities may allow you to benefit under R&D Tax Relief.

R&D Tax Credits: Linked and Partner Enterprises

Linked and Partner Enterprises

Linked and Partner enterprises are terms used by HMRC to define the nature of a relationship between companies with common shareholders. If you have common shareholders in your company, it’s important to understand how these work, as it may have an effect on whether or not you’re able to recover your R&D costs at the more beneficial SME rates (19%-33%), or at the lower RDEC rate (10.5%). We’ve translated the HMRC language to make it easier to understand how HMRC would categorise your relationships.

 

Linked Enterprises

Linked enterprises are defined as those in which one enterprise is able to exercise control, either directly or indirectly, over the affairs of another . Put simply, where a company has a majority (greater than 50%) of the shareholder’s voting rights in another enterprise, it is considered “Linked”. Though this is the most common method of determining whether a company is linked, there are actually several “tests of control” to determine whether one enterprise directly or indirectly controls another. For example, having the right to appoint or remove the majority of the members of the administrative, management or supervisory body. These tests of control would need to be applied to each company’s specific circumstances and are a topic in and of themselves; we will delve deeper into these “tests of control” in future articles.

For cases where a company has a linked enterprise, you need to aggregate all linked company figures to assess eligibility. So you would combine the entire turnover, balance sheet total and employee numbers of all enterprises when assessing eligibility.

 

Partner Enterprises

A company is considered a partner enterprise when one entity owns over 25% of the capital or voting rights in the other, but the two are not linked (as above). In cases where a company has a partner enterprise, a relevant proportion of their figures must be included when assessing its position against the eligibility criteria. For example, if a company has a 30% corporate shareholder, it would include 30% of the shareholder’s turnover, balance sheet and employee totals.

 

To illustrate these differences, here is an example:

Company A owns 70% of Company B which owns 25% of Company C. Company A wishes to make an R&D Application.

 
  • Company A and B would be considered linked enterprises. Company A would therefore need to aggregate 100% of Company B’s figures when assessing eligibility.
  • Company B and C would be considered partner enterprises. Further, when assessing eligibility, Company A would need to consider 25% of Company C’s figures.
 

Autonomous Enterprises

An autonomous enterprise is any entity that is not considered partnered or linked. As such, a company is autonomous if another company owns less than 25% of its shares, or if it owns less than 25% of another company. There are some specific instances in which a company may still be considered autonomous, despite an enterprise exceeding the 25% threshold. For example, if a venture capitalist firm or institutional investors own more than 25% of the shares, but less than 50%, a company could still be considered autonomous and thus not need to consider the figures from the other entities (providing they are not linked to one another). The relaxation of the 25% threshold is limited to cases of specified investment enterprises that play a positive role in business start-up and financing . See the Company Eligibility page on our website for more examples of entities which enable a company to retain its autonomy.

Eligibility is a complex topic and whilst we have not exhausted all of the nuances, it has hopefully served to clarify the main differences between autonomous, linked and partner enterprises. Of course, if you are exploring an R&D tax credit application with Apogee, we will do all of the necessary eligibility assessments for you, so you can feel safe in the knowledge that you’ll be getting the best recovery through the correct avenue. If you’re unsure of what category you’ll fit into, get in touch; we’re here to help. 

R&D Tax Credits: An Introduction to Eligibility

R&D Tax Credits Construction

The government-run R&D tax credits incentive is designed to encourage UK companies to invest in the development of new products, processes and services, or improving existing ones. Intended to stimulate innovation in the UK, it works by either reducing the corporation tax payable or granting a tax credit for a company undertaking qualifying activities.

Awareness and uptake of R&D tax credits has grown year on year; as of 30 June 2020, HMRC had received 59,265 applications for 2018-19, compared to 19,335 just five years earlier in 2013 -14 . Whilst recognition of R&D tax credits is clearly growing, many do not realise that there are two R&D mechanisms of recovery; the SME and RDEC schemes. Regardless of which mechanism is used, a company must be eligible to pay corporation tax to benefit from the incentive.

The ability to claim under each of the mechanisms depends on various factors: a company’s size, the existence of any connected parties (the wider corporate structure) and whether the company has received any external funding (such as grants and subsidies). A key differentiator is that the SME scheme is considered notifiable state aid (of which a company can only receive one type of for each project), whereas RDEC is not.

In the simplest terms, a company is eligible under the SME scheme if it has:

  • less than 500 employees; and
  • Either:
    • an annual turnover not exceeding $100m; or
    • a balance sheet total not exceeding $86m.

Given the financial thresholds are provided in euros, to assess eligibility a company needs to convert the turnover and balance sheet total to euros, using the exchange rate at the balance sheet date.

Where a company exceeds these thresholds, it would be unable to make an R&D application through the SME scheme and instead would be required to make an application through RDEC.

Unfortunately, whilst your individual company may initially appear to fit the SME criteria, you will need to consider connected parties. As such, when you are assessing whether you qualify under the SME scheme, it is important to consider a company’s wider corporate structure. Here HMRC refer to two important key terms: Linked Enterprises and Partner Enterprises. In future articles, we will discuss these key terms in more detail. We will also explore the impact of grant funding on a company’s ability to make an application under the SME and RDEC schemes.

The R&D tax credit schemes have many smaller nuances and intricacies. If you have queries about how your organisation fits into this criteria, the Apogee team are always willing to guide you through this.