October 30th, 2012 / Insight posted in

Tax relief for R&D costs – HMRC changing attitude

We have noticed that HM Revenue & Customs have recently been seeking to tighten their interpretation of what qualifies for Research & Development relief. Our recent seminar focused on their shifting goal posts. The key changes are:

Prototypes

Claims have been denied for expenditure on prototypes which are subsequently sold to a customer. This is due to the rule that eligible R&D does not include expenditure on products or services which are for sale to a customer. This limits R&D claims to expenditure on creating only prototypes that are eventually scrapped or used in R&D that qualifies for R&D tax relief.

Intellectual property ownership

Under the small and medium-sized R&D tax relief rules, there has always been a requirement for ownership of the resulting intellectual property right (“IPR”) to vest with the company. HMRC are now taking a tough interpretation where IPR is owned jointly. In these cases HMRC appear now to interpret tax legislation that there must be equal undivided rights to exploit the complete IPR therefore, where there are restrictions on exploitation, restricted parties will not be able to claim for R&D tax relief. This can result in neither joint venture party making a qualifying claim. This could have serious consequences for small or medium sized groups and those that have worked on joint research projects where the IPR is not shared equally.

Think tank on R&D policy

Perhaps of more concern however is the recent report by Policy Exchange, a think tank which attempts to influence the Conservative party which suggests that tax relief under the R&D Scheme for large companies should be withdrawn, putting at risk £500m of tax benefit. Large companies for this purpose are those with over 250 employees, or less than this but turnover above €50m or a balance sheet total above €43m including all linked and partner enterprises. With the UK being a leader in bio and pharmacy research sponsored by the large industry leaders, these proposals are likely to meet with some resistance.

Kingston Smith has been very successful in agreeing R&D claims with HMRC through the way we approach the Revenue. This has achieved significant repayments from the Revenue over a number of years. If you would like to explore the possibility of making an R&D claim, call Paul Spindler on 020 7566 3815.