Improving access to R&D tax credits for small business

Transcription

1 Improving access to R&D tax credits for small business Grant Thornton UK LLP (Grant Thornton) has considered the questions raised in the consultation document on improving access to R&D tax credits for small business, published by HM Revenue & Customs (HMRC) on 16 January 2015, and welcomes the opportunity to respond. Question one Do you agree that these are the most relevant factors in ensuring that small businesses can access R&D tax credits? We agree that the factors listed are the most relevant with awareness being the main issue for small businesses. We also consider that the introduction of an appropriately designed process for obtaining advanced assurance would be a significant factor in increasing confidence / providing reassurance to encourage potential claimants to make further enquiries. Question two How can HMRC better engage businesses to help increase take-up of R&D tax credits? How could businesses best obtain information on tax reliefs (social or traditional media, trade bodies, agents, other sources of information)? Who, within a company, should we target with information? (finance, R&D managers, the business owner, agents and others). What is the right time for a business to receive information? What other promotional activities could be introduced to ensure maximum take up of the reliefs? Do you consider that HMRC works sufficiently well in partnership with other government agencies? If not, why? Are there any models of good practice we might follow (eg in other countries)? Our perception is that awareness of the relief is the major factor hindering more claims being made by small businesses in particular. In addition, we believe that there are some common misconceptions of the scope of the relief by many businesses in the SME category. For example, there may be some fixation on the 'research' element as opposed to the 'development' element. Our experience suggests that some industry 'hubs' do not have sufficient knowledge and skills themselves to feel able to fully promote the relief to their members. We, therefore, agree that education will be a key driver in increasing greater take up of the relief (for example engaging directly with industry 'hubs'). Question three Are you confident that you can contact the right R&D Unit if you need to do so? Yes, as a firm of professional advisers, but we do not consider this would be true for businesses considering contacting HMRC directly.

2 Question four Is the current definition of R&D a barrier to small companies claiming R&D tax credits? Would a change in definition to align it to accounting practice simplify the rules? If so why? What alternatives might be better? If introduced, how far should this treatment be optional (say, for companies below a certain size) or should it be compulsory? What can we learn from other countries. As discussed above, we believe the main barrier for small businesses is awareness of the scheme. We do not believe that a change in the definition of R&D to align it to accounting practice would simplify the rules on the basis that the current definition of R&D for tax purposes appears to be well established and understood in the SME market (or at the very least the awareness of it and understanding is improving). As such, a change in definition could have a negative impact. R&D for accounting purposes also does not take into account certain costs (for example, consumable costs such as electricity) and a change in the definition would thus only cause confusion as to what costs could be claimed. As opposed to changing the definition, improving the ability for SMEs to overcome certain complex areas of the SME scheme would be more useful. To the extent that any change is implemented, it should be done so across all SMEs. We already have a well-established system whereby SME and large companies are differentiated and creating a further subsection of claims (for example micro entities) is only likely to cause further confusion among users of the scheme and professional advisers. Overall, this is likely to have a negative impact on take-up as well as increase HMRC time in dealing with further ad-hoc queries. Question five Are the rules over which costs qualify for relief a barrier to small companies claiming R&D tax credits? As discussed above, improving the ability for SMEs to overcome certain complex areas of the SME scheme would be useful. This can be a barrier to all SMEs claiming R&D tax credits, not just small companies. While the R&D rules are relatively well established in the legislation and guidance, there are areas where some more clarity would be useful. These are primarily around reimbursed expenses, software claims, capital versus revenue (all addressed in the R&D Consultative Committee meeting of 8 October 2014). Question six Are there other specific design features which could be simplified to help small companies? The linked/partner enterprise rules (particularly when shares are held by an investing entity that could potentially be counted as ignored (CIRD 91700)) are complex. Many start-up entities go through funding rounds whereby finance is received from different investment vehicles, and the guidance is not clear on these points. If we, as professional advisers and R&D specialists, cannot answer these questions easily internally, with all our experience and technical understanding, how is a small company accessing the relief for the first time supposed to be able to self-assess? Furthermore, in practical terms, it may not be possible for the claimant company to access the relevant information such as the turnover etc of the investing entity. In such cases, HMRC has indicated that "if you re not sure it s probably the worst case scenario". The risk being that SMEs are not able to access the relief that they are entitled to and indeed, if it later transpires that a claim under the SME regime should have been made, then the large scheme claim may be incorrect (withdrawn) but with any claim under the SME regime being time-barred. 2

3 Another area where the R&D tax relief rules can form a barrier is in respect of the externally provided worker/subcontractor definitions. These can be challenging to interpret (in a client situation) and explain (for example to an SME client particularly in the context of qualifying bodies etc). The requirement to scrutinise agreement wording in what can be very small claims could also be perceived to be onerous. Tightening up the guidance, and adding flowcharts, and more detailed examples, may help in this regard. A further point that provides a significant amount of difficulty is determining what is and is not a notified State aid (NSA). When a start-up SME is looking for finance, the nature of funding (NSA v not NSA) may not be their first thought (particularly if they have not considered R&D relief at this time or spoken to a professional adviser). Given the fact that many funding types (such as Innovation Vouchers) do not specifically prescribe if they are a NSA, it can be difficult to establish and may lead to companies incorrectly making claims under the large company scheme as opposed to the SME scheme. A list in the guidance of prescribed NSA would be a good start. Question seven If overall changes or improvements can be identified, would they be better as options or changes to the general rules, or as a particular scheme aimed at the smallest companies? As per our comments above in response to question 4, we believe that the scheme as currently designed for SMEs or large companies is satisfactory, and a further categorisation of a micro-entity would only add unhelpful complexity to the rules. Question eight Recognising that the R&D manual is used by different groups, what works well/less well and for whom with the current format? Our main responses to this point are noted under question 6. Flowcharts and prescribed lists of qualifying/non-qualifying NSA/partner enterprises bodies would be exceptionally helpful. In general, the HMRC guidance is relatively well structured and laid out. Question ten Should HMRC design its guidance around task or event rather than around the detail of the legislation? It would be useful to add some diagrams/lists to the guidance, and some further specific examples may be helpful to allow for situations to be framed. We understand that taking client situations and publishing on a no-names basis may be difficult, but some further guidance (through examples examining the intricacies) would be helpful as an improvement. One of the best solutions would be for SMEs or their professional advisers to be able to access a phone line/ inbox (as part of the advance assurance proposal) whereby queries (with relevant backing information in a prescribed format) could be directed for a response. Alternatively this could be on a no-name basis. While we appreciate that HMRC would not be able to examine each query in minute detail, 'without prejudice' responses would be useful in order to provide an SME with some comfort around the claim that they are proposing to make. Question eleven What are the top issues for small companies and intermediaries both in terms of the legislation/rules & procedures? As noted above, these would include: 1. Grant funding what is and is not a notified State aid (CTA2009 s1138) 2. SME definition types of investing entities that can be ignored as partner enterprises (CIRD91700) 3. Capital versus revenue and software 3

4 4. Subcontractor versus externally provided worker definition Question twelve Who uses the current guidance: companies, intermediaries or both? In particular who uses the Material currently on the Gov.uk s site HMRC manual The Gov.uk site is relatively simplistic and can be used as a guide/steer when providing a client with a high-level background of the relief. However, in practice we find that our own collateral, that can be tailored to the specific situation of a client (for example, covering key aspects in respect of a sector/scheme) is the most useful. Certain aspects of the CIRD manual are useful (for example, references to the BIS guidelines), however some of the manual is highly technical and does not provide answers to the fundamental points that clients are looking to consider (see responses to question 11). Question thirteen How would companies and intermediaries prefer guidance to be set out. Alternatives could include: In the current format as a manual; Additional illustrations/case study, Q&A, decision tree; Via online forums, webinars, Youtube etc; Embedded in rules based applications (accounting software). The current manual format does have certain positives and could easily be enhanced through the use of the items outlined in the second bullet point on this question. Specific examples of this could include NSA rules and linked/partner enterprise definition improvement. A further useful addition would be direct access to a SME specialist who, as mentioned above, could provide a without prejudice answer to queries. The use of an online forum may work. However, this would have to be monitored and responses would have to go beyond general reference to the guidance contained in the manuals. There are also issues around client confidentiality here and a preferable approach would be a dedicated phoneline/inbox (advance assurance) with a promise of a response within, say, five working days. The method of improving guidance must be by improving the specifics and making key points easier to research adding further complexity to the guidance should not be encouraged. Question fourteen Would the approach set out above improve take-up of R&D tax credits amongst firms who have never made a claim? Improving the system by which SMEs can gain access to answers in respect of more 'complex' technical points (particularly where a professional adviser is still struggling to interpret the rules) would be a great enhancement to the scheme and would likely result in more claims being made, more accuracy in relation to claims that are already being made and confidence generated on both the SME side as well as HMRC s side that claims are being prepared and made on the correct basis. Some micro SMEs may not be able to afford professional advice which should not bar access to the scheme. Making the system easy to use and giving micro business owners the power to access the right material at the right level would be a fundamental positive for the scheme. 4

5 Question fifteen We would welcome views on the design of the advance assurance service including The companies that would benefit most (i.e. in encouraging them to carry out R&D and grow faster) What specific issues do companies encounter in making their first claim? For how long an advance assurance should remain valid? Whether your company (or a company you advise) would be likely to use advance assurances (and if not, why not)? Any issues for particular sectors/types of company in administering and designing advanced assurance? How the service should be advertised? The companies that would benefit most are those that encounter uncertainty or barriers in achieving the relevant assurances to give them sufficient comfort to make their first claim. The key issues are as covered above in previous responses. An advance assurance system should hold until the fact pattern changes. It should be designed so that a change in circumstance requires either further assurance to be sought, or for the business to make an informed judgement call as to how any new circumstance affects their claim status. The key to the effectiveness of any advance assurance process is in ensuring that output is tailored and structured (focussed on the client specifics) as well as timely (for example five-seven working days). Provision of information in a standard template should suffice assuming that the template is laid out to allow for the key specifics of a client situation to be explained. Question sixteen Another way to improve administration might be to link the advanced assurance service with access to finance. When attracting finance for an R&D project, how is the ability influenced by R&D tax credits? How could an advanced assurances service be structured to support access to funding? There are a few areas which are important here: In terms of access to funding (for example grant funding) then specific funding being badged as an NSA would be helpful as this would allow for sufficient clarity around whether an NSA has been received or not. This would likely involve HMRC working with traditional backers (which would work well in terms of promoting the scheme) to allow for clarity to be achieved. In our experience, investors do take account of a business being innovative (be that through R&D work/patents) and this would be taken into account in their investment decision. As such, giving a business absolute clarity as to their capacity to claim would be very helpful. We are aware of certain innovative financing products available in the marketplace, and R&D tax credits form part of the finance house s calculation as to whether funding is offered. It is clear that it is something that those participating in the funding market are considering. Question seventeen Are there any specific aspects of the way which a claim is made or processed which could be simplified or improved? If an advanced assurance process is agreed, it would be useful within this process to agree what information should be provided by an SME in supporting their final claim. Question eighteen Do you agree with the impact assessment? In particular do you think that changes to the R&D tax credits could have equality impacts. The impact assessment appears to be reasonable. 5

6 Contacts For any queries in respect of our comments in this document, please contact: Nicola Mandale Andrew Holloway Grant Thornton UK LLP Grant Thornton House Melton Street Euston Square LONDON NW1 2EP Telephone: Fax: Grant Thornton UK LLP. All rights reserved. 'Grant Thornton' refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. 6