R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

THE UK RESEARCH AND DEVELOPMENT TAX CREDIT SCHEME A GUIDE FOR THE MOTORSPORT AND HIGH PERFORMANCE ENGINEERING INDUSTRY

The Motorsport Industry Association (MIA) is the world’s leading, and by far the largest, trade association for motorsport’s performance engineering, entertainment, services and tuning industry. It represents the specialised needs of this highly successful Industry which, although extending throughout the world and rapidly expanding in developing nations, is largely centred here in the UK.

Companies within MIA membership embrace a wide variety of disciplines including; motorsport and performance engineeering, race and rally teams, governing bodies, motorsport services, research organisations, race circuits, legal and financial, sponsorship and marketing, universities and colleges amongst many others. Motorsport Industry Association Contact: Katrina BriggsTel: 02476 692600 katrina.briggs@the-mia.com

www.the-mia.com Carrim Bundhun carrim.bundhun@the-mia.com

This guide has been created to provide advice to those involved in research and development within the UK motorsport and performance engineering industry. It will answer these questions:

• WhatistheR&DTaxCreditSchemeintheUK?

• Howcanitdeliversignificantbenefitstocompaniesintheindustry?

• Whichcompaniesdoesitapplyto?

• HowcanaUKbusinessbegintheprocessofmakingaclaim?

• Howtomaximisethevalueoffutureclaims.

The R&D Tax Credit scheme may, at first, seem complex and difficult to understand which may, sadly, deter some companies from claiming their entitled tax relief - this guide aims to address this problem.

Over the past year the MIA, generously supported by our professional partners, has delivered a programme of face-to-face workshops to guide companies through the R&D Tax Credit scheme. Knowledge from this programme has led to this specialised guide for the industry.

This guide will explain, in clear terms and illustrated by relevant, real industry examples, how this valuable and popular scheme works and how UK motorsport companies can take full advantage of it.

CONTENTS: AwelcomemessagefromtheMIA 4

1. UNDERSTANDING THE R&D TAX CREDIT SCHEME WhatistheR&DTaxCreditscheme 5

HowmuchistheR&DTaxCreditschemeworth 5

HowisR&DTaxReliefcalculatedforanSME 6

LargeCompanyScheme 6

R&DExpenditureCredit(RDEC) 6

What’sholdingtheindustrybackfrommakingR&DTaxCreditclaims 6

WillyourbusinessqualifyforR&DTaxCredits 7

2. DEFINING RESEARCH AND DEVELOPMENT Whattheofficialguidelinessay 8

Whatisan‘advance’ 9

Whatismeantby‘scienceandtechnology’ 9

Whendoesdesignbecomeresearchanddevelopment 9

WhichcostsqualifyforR&DTaxRelief 10

The‘wholecar’concept 11

DoestestingqualifyforR&DTaxRelief 12

Research&DevelopmentAllowanceforcapitalexpenditure 12

SMEPayableTaxCreditforlossmakingcompanies 12

VoluntaryAdvanceAssuranceforsmallerbusinesses 13

Asummaryofrecentchangesandimprovementstothescheme 14

3. FINDING A WINNING FORMULA Harris&CoadviseaRaceTeamtohelpprovideinvestmentforthefuture 15

R&DTaxSpecialistsadviseonaF1coolingsystemreliefvalve 16

PwChelpdevelopamethodologyforacompanytoclaimR&DTaxCredits 17

4. GETTING STARTED FivesimplestepstowardsmakingaclaimforanR&DTaxCredit 18

5. PATENT BOX Whatisqualifyingincome 20

Whatisqualifyingdevelopment 20

ActiveManagementcondition 20

MakingaPatentBoxclaim 20

PhasinginofPatentBox 21

PatentBoxTaxRelief-consultationandproposedchanges 21

6. WHERE CAN I GET MORE INFORMATION AND ADVICE? Howlongdoesittaketocompiletheevidenceneededforaclaim 22

Ifnorecordsofstafftime/materialscommittedtopreviouslycompletedprojectswerekept,

cancostsstillbeclaimed 23

WhathappensifHMRCwanttoaudityourclaim 23

Whathappensifprojectsaresubsidised 23

Formajor,multi-disciplinaryprojects-canmorethanonecompanyclaimforthesameproject 23

Bymakingaclaim,won’tweberevealingconfidentialinformationaboutuniqueproducts,performances

orprocesseswehavedeveloped 24

Wearenoteligibletomakeaclaim,arethereanyotherincentivesavailableforresearchanddevelopment 24

FurtherinformationontheR&DTaxCreditscheme 24

APPENDIX 1: ProgrammePartners 25

R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

5

A WELCOME MESSAGE FROM THE MIA

I have long said that if your company operates in the engineering world of motorsport, in some way, then you are very likely to qualify for a R&D Tax Credit, so get claiming. Why just one in three motorsport and high performance engineering companies claim these credits completely baffles me!

Our companies continually make the world’s best products as a direct result of endless R&D - we ‘race prototypes’ for heaven’s sake!

I am pleased the MIA has created, with our professional partners, this useful guide to the world of R&D Tax Credits, as they relate to our industry. I know you will find this of real value as it helps you along the potentially profitable road of securing a tax credit for your business.

Check this latest information to maximise your current claims or before you start on the process - an unbeatable wealth of relevant knowledge from the best R&D professional advisers, with specific motorsport knowledge, is included.

These tax credits have, literally, changed the fortunes of many enlightened people in motorsport. Collectively millions of pounds have been re-invested in R&D as a direct result, making all those who claim ever more competitive in a tough world. If you haven’t yet claimed - large or small - please make 2016 the year you get onto this scheme and you can claim for all qualifying R&D undertaken over the past two years.

The UK is one of the most pro-active countries in regard to such tax credits and the offer from our government is amongst the most generous in the world. Their aim is simple - to encourage innovation and increased spending on R&D activities by UK companies and, in recent years, the rates have increased significantly to further incentivise companies to claim. Make sure you are one of them, please.

The MIA team, together with all our professional R&D tax partners, are here to help you gain the maximum benefit from your R&D Tax Credit claim, so please make full use of our offer.

It will be our pleasure to secure your success.

Good luck and best regards,

Chris Aylett, Chief ExecutiveMotorsport Industry Association (MIA)

1. UNDERSTANDING THE R&D TAX CREDIT SCHEMEIf your business is liable for UK Corporation Tax...then you could be missing out on this relief

WHAT IS THE R&D TAX CREDIT SCHEME?

EachyeartheR&DTaxCreditschemefromHMRevenue&Customs(HMRC)providessome£1.75

billionintaxincentivestoencourageinvestmentininnovationandincreasedR&DspendingbyUK

companies.Itisoneofthemostcompetitiveofsuchschemesintheworld.

Themoreinvestmentismadeinresearch,developmentandtechnology,thegreaterthebenefits

toindividualcompaniesandthewiderUKeconomy.Investmentbringsaddedvaluetobusinesses

helpingthemtoremaincompetitiveandsomakesaninvaluablecontributiontoeconomicgrowth.

Putsimply,theR&DTaxCreditsystemencouragesandrewardsinvestmentinresearch,development

andinnovationbyallowingcosts,includingthoseofstaff,onrelevantprojectstobeclaimedbackas

reliefforCorporationTax.Thiscanresultinsubstantialsavingsforthecompanyinvolved.

TheUKR&DTaxCreditscheme,whichbeganin2000,continuestoenjoystronggovernment

support.IntheMarch2015Budget,forexample,thegovernmentannouncedincreasesintaxrelief

undertheschemeforsmallandmedium-sizedenterprises(SMEs)applyingtoR&Dspendingfrom1

April2015.Throughongoingconsultationwithbusinessandtaxprofessionals,HMRCcontinuesto

considerwaystoimprovetheefficiencyandeffectivenessofthescheme.

TheUKmotorsportandhighperformanceengineeringindustryisamongthemostinnovativeinthe

world.Surprisingly,thisoutstandingpositionisnotreflectedbytherelativelylowleveloftakeupof

theR&DTaxCreditscheme.Lessthanoneinthreecompaniesfromthissectorhavetakenadvantage

ofthebenefitsunderthescheme1meaningthereishugefuturepotentialformoretodoso.

Theschemewillnotapplytoallthoseinthisindustrybutasthe‘endproduct’ofmuchofthe

engineeringworkisincreatingandracing‘prototype‘solutionsthefigureshouldbefarhigher.It

seemsmanywhocouldbenefitareunnecessarilyrulingoutwhatis,currently,theUKgovernment’s

singlelargestareaoffinancialsupportforbusiness.

Aswithanytaxscheme,thecriteriaforeligibilityandtheprocessforclaimingtaxcreditscanseem

complex.Thisguideisnotablueprintforsecuringtaxcredits-butitshouldhelpyoutounderstand

thescheme,assesswhetheritcouldbeworthwhileforyourbusinessand,ifso,gettheprocess

started.

HOW MUCH IS THE R&D TAX CREDIT SCHEME WORTH?

SincetheR&DTaxCreditschemewasfirstintroducedintheUKin2000,some42,000companies

acrosstheUKhavebenefitedfromnearly£11.5billionintaxrelief.Theschemeisincreasingly

becomingpartoffutureinvestmentplanningformanycompaniesinthewidereconomy.

TheamountofsavingstobemadefromR&DTaxCreditswilldependonthesizeofyourbusiness.

Therearetwoschemesforclaimingrelief:

• TheSMESchemeappliestocompanieswithunder500employeesandeitherofthe

following:anannualturnovernotexceeding€100millionorabalancesheetnot exceeding€86million

• TheLargeCompanySchemehas,sinceApril2013,beenfurtherdevelopedastheR&D

ExpenditureCredit(RDEC).

Whilstotherfactorsmaycomeintoplay,broadlyspeakingbusinesseswhichqualifyasanSMEcan

expecttoseeanetcashsavingofupto30%ofrelevantcosts,andlargerbusinessesasavingofup

to11%.

Eachyear,around30%ofclaimscomefromthosemakingaclaimforthefirsttimeandtheaverage

claimforSMEscurrentlystandsataround£46,000.ThoseSMEsmakingclaimsinsubsequentyears

doevenbetter,e.g.companiesmakingsixormoreclaimshaveanaverageannualclaimof£61,0002.

UK R&D TAX CREDIT SCHEME - FACTS AND FIGURES

TheUK’ssinglelargestfundingsourceforbusinessresearchanddevelopment

£11.4billionsuccessfullyclaimedbyUKcompaniesbetween2000and2014

CorporationTaxrelieforrebateofupto30%ofrelevantcosts

Anaverageof£46,000inannualclaimsforSMEcompanies

1 ‘Renewing the Evidence Base of Britain’s Motorsport Valley® 2013’: published by Motorsport Research Associates 2013

2 HM Revenue & Customs, 2015. Working Paper 17 – An evaluation of research and development tax credit. [online] Available at: http://www.the-mia.com/assets/hmrc-evaluationofrdtaxcreditworkingpaper17.pdf [Accessed 3 December 2015]

R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

76 R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

Claimscanbemadeforcostsincurredonprojectsundertaken,andincludedintheaccounts,over

theprevioustwofinancialyears.Forprojectsundertakenfrom1April2012,thereisnominimum

spendontheamountofresearchanddevelopmentbeforeyourbusinesscanclaimtaxrelief.

HOW IS R&D TAX RELIEF CALCULATED FOR AN SME?

UndertheSMEscheme,CorporationTaxreliefisgivenviaanadditionaldeductioninthetax

computation.Forqualifyingexpenditureon/after1April2015anadditionaldeductionof130%of

theeligibleexpenditureisallowed.AtaCorporationTaxrateof20%,thisresultsinasavingof£26

forevery£100ofqualifyingexpenditure(NBforexpenditurebetween1April2012and31March

2015theenhancementis125%).Forloss-makers,thelosscanbesurrenderedforacashback.

LARGE COMPANY SCHEME

UndertheLargeCompanyscheme,CorporationTaxreliefisgivenviaanadditionaldeductioninthe

taxcomputation.Forqualifyingexpenditureincurredon/after1April2015anadditionaldeduction

of30%oftheeligibleexpenditureisallowed,ataCorporationTaxrateof20%-thisresultsinatax

savingof£6forevery£100ofqualifyingR&Dexpenditure.

NotebelowthattheLargeCompanyschemeiscurrentlytransitioningtotheR&DExpenditureCredit

(RDEC)andwillnolongerbeavailableforexpenditureon/after1April2016.

R&D EXPENDITURE CREDIT (RDEC)

RDECwasintroducedforexpenditurearisingon/after1April2013tograduallyreplacetheLarge

Companyscheme,describedabove.Forexpenditureupuntil31March2016,largecompanies

canchoosetoelectintoeithertheLargeCompanyschemeorRDEC.OnceRDECclaimsaremade,

companiescannotthenreverttotheLargeCompanyscheme.

RDECisavailabletobothcompanieswithtaxableprofits,aswellasthoseinalossmakingposition.

From1April2015,thisprovidesforan11%P&Lcreditpayableonqualifyingexpenditure(between

1April2013and31March2015:10%).Thiscreditalsoappliestoprojectswhicharesubsidised,

grantfundedorsub-contracted,whateverthesizeofthebusiness(seeSection6).

RDECistreatedintheP&L(andCorporationTaxReturn)asincomereceivable(enhancingEBITDA*)

andistaxable.Aftertax(2015:20%)thenetcashtaxvalueis8.8%andis,therefore,slightlymore

advantageousthantheLargeCompanyscheme.

RDECcaneitherbeclaimedasanoffsetagainstataxliability,orcanberepaidtoacompanywithno

suchliabilities(subjecttomeetingfurtherdetailedrequirements,forexampleaPAYEcap).

WHAT’S HOLDING THE INDUSTRY BACK FROM MAKING R&D TAX CREDIT CLAIMS?

1. LackofknowledgeofR&Dactivity-whatconstitutesan‘advance’/R&D

2. LackofknowledgeofR&DTaxCreditscheme-definitions,process,work/time/effort

required

3. Motorsportbusinessesare‘timepoor’-notimetoinvestigateclaiming/preparing

claimsandsounabletomakeaninformed‘risk/reward’decision

4. PastexperienceofHMRC-businessesarereticentabout‘openingup’toHMRC,fearing

furtherinvestigationintocompanyaffairs.

WILL YOUR BUSINESS QUALIFY FOR R&D TAX CREDITS?

BeforereadingonandgoingintotheR&DTaxCreditschemeinmoredetail,youshouldworkout

whethertheschemeappliestoyourcompany.

ItwillonlyapplyifyourcompanyisliabletoUKCorporationTax(althoughyoudonothavetobe

actuallypayingUKtax).It’simportanttonotethatapayablecreditisavailableforbothlargeandSME

companieswhichhavemadelossesintheperiod.

IfyourcompanyisnotliabletoCorporationTaxandyouarenotdirectlyinvolvedininnovationthen

theR&DTaxCreditschememaynotseemrelevant.However,itcouldstillbeveryworthwhilefor

youtoconsiderhowtheschemecouldbenefitthosewithwhomyoucollaborateincludingyour

supplychain.Byensuringtheyclaimfullreliefthenyoucouldimprovetheircompetitiveoffertoyour

company.

Youshouldalsotakethetimetocheckoutothersourcesoffundingwhichsupportinnovationand

opportunitiestocultivatenewideas(seeSection6).

Are you liable to UK Corporation Tax?

Limited Liability Partnerships (LLPs) are unable to apply

See Section 6 of this guide for other R&D funding opportunities

NO

YES

NO

READ ON

Are you involved in innovating, i.e.

• appreciablyimproving

• improvingperformance

• developingoraddingvalueto products and processes

Innovation might be planned or might emerge through the need to resolve a problem

Explore opportunities to work with your supply chain to unlock tax relief and value through product/process improvement

© LAT Photographic 2014

© LAT Photographic 2014

* Earnings Before Interest, Taxes, Depreciation and Amortisation

R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

8 R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

92. DEFINING RESEARCH AND DEVELOPMENT

Fortaxpurposes,thedefinitionof‘researchanddevelopment’isbroadanditcan,insome

circumstances,applytowhatmightotherwisebeseenasnormalday-to-daybusiness.

AccordingtoHMRCguidelines,researchanddevelopmenttakesplacewhenaproject,ora

componentofalargerproject,seekstoachieveanadvanceinscienceortechnology,throughthe

resolutionofscientificortechnologicaluncertaintiesthatarenotreadilydeduciblebyacompetent

professional.

ANYactivity,whichdirectlycontributestoseekinganadvancethroughtheresolutionofascientific

ortechnologicaluncertainty,canbeclassifiedas‘researchanddevelopment’fortaxpurposes.

WHAT THE OFFICIAL GUIDELINES SAY

HMRCusesacomprehensivesetofguidelinescompiledbytheDepartmentofTradeandIndustry

(DTI)in2004.3TheBIS(formerlyDTI)Guidelines(2004)areamplifiedaspartoftheHMRCCorporate

IntangiblesResearchandDevelopmentManual.4

Whatthemotorsportindustryneedstoknowcanbeputmoresimply,butitismostimportanttobe

clearastowhatismeantbythewords-‘advance’,‘uncertainty’and‘directlycontribute’.

PRINCIPLE BIS DEFINITION3

ADVANCE

UNCERTAINTY

WHAT IS AN ‘ADVANCE’?WHAT IS MEANT BY ‘SCIENCE AND TECHNOLOGY’?

WHAT IS AN ‘ADVANCE’?

Thismustrepresentanadvanceintheoverallknowledgeorcapabilityinafieldofscienceor

technology,notacompany’sownstateofknowledgeorcapabilityalone.Anadvancecanbean

appreciableimprovementtoanexistingproduct,processetc.

For example, a race team developing a race car from a road car, found that in high

speed corners, the standard engine suffered oil surges resulting in oil starvation

in some cylinders. Existing baffle designs in the sump failed to cure the problem.

New baffles were designed to retain sufficient oil in the sump to allow a constant

quantity of oil flow to the oil pump, so preventing oil shortages in cylinders.

WHAT IS MEANT BY ‘SCIENCE AND TECHNOLOGY’?

Itiscrucialforabusinesstodeterminewhetherpast,currentorfutureactivitiescanbeclassifiedas

scienceortechnology.TheBISGuidelines(2004)setoutthesespecificdefinitions:

• Scienceisthesystematicstudyofthenatureandbehaviourofthephysicalandmaterial

universe.Workinthearts,humanitiesandsocialsciences,includingeconomics,

isnotscienceforthepurposeoftheseguidelines.Mathematicaltechniquesare

frequentlyusedinscience,butmathematicaladvances,inandofthemselves,arenot

scienceunlesstheyareadvancesinrepresentingthenatureandbehaviourofthe

physicalandmaterialuniverse

• Technologyisthepracticalapplicationofscientificprinciplesandknowledge,where

‘scientific’isbasedonthedefinitionofscienceabove.Theseguidelinesapplyequallyto

workinanybranchorfieldoftechnology.

Businessesneedtoassesswhethertheirworkhas,initself,directlycontributedtoan‘advancein

scienceortechnology’.WorkthatisjustaprecursortoR&Dactivitiestobecarriedoutbyother

organisations,furtheralongtheprojecttimeline,doesnotqualifyundertheR&DTaxCreditscheme.

Thereis,intentionally,noofficial,definitivelistofactivitieswhichcouldberegardedasscientificand/

ortechnological.IndoingsothisavoidstheR&DTaxCreditschemefrombeingoverlyprescriptive.

Someactivitiesare,however,morelikelytofallwithinthecategoryof‘scienceandtechnology’than

others.Someofthesemayinclude:

• Thedevelopmentofnewproductsorproductionprocessesforcustomerprojectsorfor

thecompany’sownpurposes

• Theimprovement,oradaptation,ofexistingproductsorproductionprocessesfor

customerprojectsorforthecompany’sownpurposes.

Thisisnotanexhaustivelistbutwillgiveyouanideaofthetypesofworkthatcouldwellbeeligible

forR&DTaxCredits.Italsodemonstratesthatmanyoftheappropriatecriteriaapplytothekindsof

researchanddevelopmentworkwhichtheUKmotorsportindustryundertakes.

WHEN DOES DESIGN BECOME RESEARCH AND DEVELOPMENT?

Formanyprojects,companiesprovidearangeofservicesaroundthedesignofaproductwhichdoes

notrequireinnovationorresearchanddevelopment.Howeverwhensuchdesigns,developedby

thecompanies,areinnovativeandcanbeshownto‘advancescienceand/ortechnology’thentheir

potentialforqualifyingforR&DTaxCreditsshouldbeexplored.

Createorappreciablyimproveaprocess,productorservicewhich

incorporatesorrepresentsanincreaseinoverallknowledgeor

capabilityinafieldofscienceortechnology

Therearenoabsoluteindicatorsof‘appreciableimprovement’;

however,(hypothetic)recognitionof‘appreciableimprovement’bya

‘competentprofessional’isregardedasagoodstartingpoint

Whereknowledgeofwhethersomethingisscientificallypossibleor

technologicallyfeasible,orhowtoachieveitinpractice,isnotreadily

availableordeduciblebya‘competentprofessional’workingwithin

thesector

Includessystemuncertainty;scientificortechnologicaluncertainty

willoftenarisewhentranslatingsomethingalreadyestablishedas

scientificallyfeasibleintoacost-effective,reliableandreproducible

process,material,device,productorservice

Courtesy of Mercedes-Benz World

Courtesy of Xtrac

© Mercedes AMG Petronas Formula One Team

Courtesy of Xtrac

3 Department of Trade and Industry, 2004. CIRD81900 - R&D Tax Relief: conditions to be satisfied: BIS Guidelines (formerly DTI Guidelines) (2004) – text. [online] Available at: www.hmrc.gov.uk/manuals/cirdmanual/CIRD81900.htm [Accessed 3 December 2015]

4 HM Revenue & Customs, 2012. Corporate Intangibles Research and Development Manual (CIRD 00500, 10000, 60000, 70000, 75000, 80000). [online] Available at www.hmrc.gov.uk/manuals/cirdmanual/index.htm [Accessed 3 December 2015]

R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

10 R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

11

TheBISGuidelines(2004)makeclearthatwhen,toachieveadesignobjective,ascientificor

technologicaluncertaintywithinaparticularprojectneedstoberesolved,thentheactivitiesneeded

todothiswouldqualifyas‘researchanddevelopment.’Designactivitiesthatdonotdirectly

contributetotheresolutionofascientificortechnologicaluncertaintywithinaproject,ontheother

hand,wouldnotcountas‘researchanddevelopment’undertheseterms.

Whatisimportant,then,istodemonstratehowdesignactivitieshavedirectlycontributedto

achievinganadvanceinscienceandtechnology.Thedesignstagemustinvolvesomeresolutionof

uncertaintytocomply,orperhapsbeaprecursortosubsequentanalysisandtestingofthedesign,

providedthatthisworkisundertakenbythesamecompany.

For example,a specialist car manufacturer claimed R&D Tax Credits on the costs

of design work on a range of new models. Not only did the manufacturer spend

significant sums on designing cars of outstanding beauty - and had created a

market-leading brand as a result - they implemented new design processes that

incorporated ground-breaking technology. Great artistic design might win market

share, but to qualify for R&D Tax Credits, the specialist car manufacturer needed

to seek an advance in technology by attempting to overcome genuine uncertainty

of what is technically feasible. The company clearly demonstrated that it had done

so and the claim resulted in a significant tax payment from HMRC in respect of the

qualifying project activities.

WHICH COSTS QUALIFY FOR R&D TAX RELIEF?

ThemainsourceofcostsforresearchanddevelopmenteligibleforaclaimforR&DTaxCreditrelief

are:

• Staff:costsofstaff(includingsalary,bonuses,employers’NIC,pensioncontributions, butnotbenefitsinkind)directlycontributingtotheresolutionoftheuncertainty

inquestion.Forexample:technicalplanning;design;testing;analysis;and/orother

‘non-routine’activities;allcalculatedbasedonapercentageoftimespentonthe

relevantR&Dactivity.TimespentonQualifyingIndirectActivities(QIA)canalsoqualify

forclaimpurposes(seeparagraph5oftheBISGuidelines2004)

• Sub-contracted services:costsforsub-contractedservices.Forexample,wherea discretepartoftheprojectisgiventoathirdparty,suchastesting,thenreliefcanbe

claimedonupto65%ofthepaymentmadetothesubcontractor

• Externally provided workers:whereanexternallyprovidedworkerisbroughtinto workalongsidethecompany’sstaff,generally65%ofthecostcanbeclaimed(or

100%forconnectedparties*)

• Consumable items:revenueexpenditureonconsumableortransformablematerials, includingwater,fuelandpower,useddirectlyinundertakingresearchand

development.NotetheAutumnStatement2014clarifiedthatyoucannotclaimforany

R&Dmaterialsthatareincludedinaproductthatissold

• Software costs:whererevenueexpenditureisincurredonsoftwareemployeddirectly inR&D,includingQIA.IfsoftwareisonlypartlyemployedindirectR&Danappropriate

apportionmentoftheexpenditureshouldbemade.

Specialrulesmayapplyiftheexpenditureissubsidisedbywayofagrantorsubsidy(seesection6).

THE ‘WHOLE CAR’ CONCEPT

Companiesshouldn’tfallintothetrapofassuminga‘wholeracecar’willqualifyforR&DTaxCredits

throughoutitslifetime.Anyclaimmustbebasedonindividualprojectsinaccordancewithlegislation.

Section13oftheBISGuidelines(2004)defines‘whatistechnologicaluncertainty‘,butrefined

bySection14whichstatesthat‘improvements,optimisationsandfine-tuning,whichdonot

materiallyaffecttheunderlyingscienceortechnology,donotconstituteworktoresolveascientificor

technologicaluncertainty‘.

Preparingacartoachieveoptimumperformanceforeachmotorsporteventisconsideredtobe

coveredbySection14above.Similarly,strippingdownacaraftereacheventisnotrelatedtoa

specificprojectandasaresultwouldbenon-qualifying.

For example,when developing a new motorsport car the following costs can

normally be claimed:

• Design: new innovations such as new body shape to reduce drag or a new

chassis design to optimise performance. However, not cockpit ergonomics, nor

design using already known technology such as seats, front wing, etc., but this

may vary for each project

• Development: taking a car from CAD to prototype is mainly eligible for a

claim as is any necessary element to test the R&D design

• Testing the prototype normally qualifies as R&D testing

• Building a car is where R&D usually ends, but there may be some

‘spikes ‘of R&D activity where new technological problems arise and need to

be resolved

Thefollowingcostswouldnotnormallyqualify:

• Ineligible R&D costs,suchasrentandleasingtracksfortesting

• Routine project activities,e.g.whenanexistingproblemhasknownwaysto overcome

• Material costswhicharesold,forexamplewithincarssoldtocustomers

• Commercial and marketing work,unlessdirectlysupportingtheR&Dpartof theactivities

• Changing car specificationsforeachcircuitorevent,unlessnewinnovations

areincludedwhichrequiretesting.

WestronglyrecommendobtainingadvicefromHMRCoryouradviserstoestablish,inadvance,which

costsqualifyineachcase,whichwilldependontheirpurposeanduseintheproposedR&Dactivities.

Courtesy of RML Group

Courtesy of Sigmatex

Courtesy of RML Group

* One company connected with another, under common control (ICTA88 S.839)

R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

12 R&D TAX CREDIT GUIDELINESFOR THE MOTORSPORT INDUSTRY

13

DOES TESTING QUALIFY FOR R&D TAX RELIEF?

Companiesneedtobecarefulwhenclaimingforexpensesinrespectoftesting.Testing,initself,

isnotaqualifyingR&Dcostunlessanewandnoveltestingprogrammehashadtobedeveloped.

Qualifyingexpenditurerelatessolelytotestinganadvanceinscienceortechnology,notgeneral

testing.

Furthermore,itisonlyconsideredtobequalifyingR&Difthetestingisundertakenbythesame

businesswhichdesignedtheprototypeorifanSMEsubcontractstestingouttoanothercompany,

ratherthanjusthiringatrack.Inprinciple,thehireofavenueisnotaneligibleexpenseforeither

thecircuitorthecompanyusingthefacilities.However,incertaincircumstances,wherethetesting

relatestotestinga‘technicaladvance’thenthetimespenttestingonthetrackmaybeeligibleasan

R&Dexpense.

For example, if a company hires a track for testing, then time spent at the track

by company employees can be claimed, but payments to the track cannot, as hire

costs are not an eligible cost.

If a company pays the track to test a car (i.e. the track does the test work) then

as all the test work is being undertaken by the track and its employees, this is

‘subcontracted R&D‘ by the company and, as such, the costs may be claimed by the

company at 65%, if an SME (but not for large companies).

If a track or circuit is requested to develop a test programme for a car and then

tests and develops the car to the required specifications then…

• Ifthecircuittakesthecommercialriskoftheprogramme,beingonlypaidif

successful, it could claim R&D Tax Relief

• Ifthistestprogrammeis‘subcontractedR&D’fromthecompanytothecircuit,

then the costs can be claimed by the company at 65% if an SME, or by the

circuitifthecompanyis‘large’.

RESEARCH & DEVELOPMENT ALLOWANCE FOR CAPITAL EXPENDITURE

TheR&DAllowancegivesrelief,atarateof100%,forCapitalExpenditureincurredonR&Dactivity

whichisdirectlyundertakenbyatrader,providedtheR&Disrelatedtothetradecarriedon.

SME PAYABLE TAX CREDIT FOR LOSS MAKING COMPANIES

WhereanSMEcompanyhasmadelossesintheperioditisstillpossibletomakeaclaimfora

‘payabletaxcredit’.ThiswouldbeforthelesseroftheenhancedR&Dexpenditure(e.g.at130%)

andtheunrelievedtradinglossfortheperiod.Therateofthe‘payabletaxcredit’dependsuponthe

dateswithinwhichtheexpenditurewasincurred,asfollows:

1April2011-31March2012 12.5%

1April2012-31March2014 11%

From1April2014 14.5%

VOLUNTARY ADVANCED ASSURANCE FOR SMALLER BUSINESSES

FromNovember2015,HMRChaveintroducedanentirelyvoluntaryscheme,AdvanceAssurance.

ThiswillhelpsmallcompanieswhowanttoclaimR&DTaxReliefforthefirsttime,andhastobe

completedanytimebeforetheyfirstclaimforR&DTaxRelief.

ThebenefitisthatforthefirstTHREEaccountingperiodsafterclaimingforR&DTaxReliefforthe

firsttime,HMRCwillallowaclaimfromthoseontheAdvanceAssurancescheme,withoutfurther

enquiries.

Anycompanycan,ofcourse,applyforR&DTaxReliefwithoutvolunteeringforAdvanceAssurance.

Advantages of Advance Assurance

WhenapplyingforAdvanceAssurance,anHMRCspecialistwillhelpthecompanyunderstandand

complywiththeR&DTaxReliefconditions5.OncegivenAdvanceAssurance,thecompanycanthen

concentrateontheirbusiness,ratherthanonR&Dtaxclaims.Inaddition,AdvanceAssurancegives

proofthatthecompanywillgetR&DTaxReliefwhichmayhelpsecurefunding.

Who can apply for Advance Assurance?

AnycompanycanapplyforAdvanceAssuranceifit’splanningtocarryout,orhaspreviouslycarried

outR&D,andcanmeetcertainconditionsatthedateofapplication,whicharethat:

• Ithasn’tclaimedR&DTaxReliefbefore

• Itsannualturnoveris£2millionorless

• Ithaslessthan50employees.

Theseconditionsmayapplyevenifacompanyispartofagroupofcompanies,butitisbesttocheck

whocan’tapplyforAdvanceAssurance5tobecertain.

IfthecompanyplanstocarryoutmoreR&Dinthefuture,thenHMRCwillmakecontact,afterthe

firstclaimissubmitted,tocheckfutureR&DmatchesthedetailsgivenintheAdvanceAssurance

application.

ProfessionalagentscanapplyforAdvanceAssuranceonthecompany’sbehalf.

WhenHMRCcontactsyoutodiscussyourapplication5,they’llneedtotalktoacompanydirectoror

anemployee(forexample,researchmanager),howeveryouragentwillbeabletocontribute.

5 HM Revenue & Customs, 2015. Corporation Tax: Research and Development (R&D) Relief: Advance Assurance [online] Available at www.gov.uk/guidance/research-and-development-tax-relief-advance-assurance [Accessed 3 December 2015]

Courtesy of Sigmatex

© LAT Photographic 2014