New tax incentives for small and medium-sized companies
ACCA's response to the Inland Revenue's consultative paper 'R & D: New tax incentives for small and medium-sized companies' is set out below.
General
In general terms we consider any attempt to offer incentives for research and development should be encouraged. We are however, concerned that there will be an attempt to "claw back" revenue from existing reliefs to pay for some of the costs. We comment further, on this point, below. We consider that the structure of the document could have been set out in a more logical manner. It tends to cover the same subject areas in more than one place. This makes commenting difficult and more diffused. Our comments follow the order of the consultation paper.
Introduction
Paragraph 1.3 and 1.4
We have already stated that we consider any form of fiscal assistance for research and development is to be welcome however, we are not convinced that indigenous research and development necessarily leads to greater productivity and job creation. Examples of our thinking on the matter exist in the case of overseas companies which have set up UK transplants. The UK has demonstrated significant ability to innovate but has then failed dismally in the implementation phase. We are pleased that the paper recognises the need for additional support mechanisms for taking the research forward so that UK industry actually benefits. To this end the tax relief could be introduced first but the additional "infrastructure" to support implementation of the research must follow quickly.
Paragraph 1.10 The proposed scheme
The restriction of the scheme to small businesses is a very artificial demarcation and one which may not necessarily produce the best results as there are likely to be resource limitations for the small business; they will only be in a position to undertake fairly small scale research. We appreciate that there are Government resource constraints which require this relief to be made available on a small scale to start with however, if it proves successful it should be expanded to include larger businesses.
At the other extreme the £50,000 starting point for the relief is also arbitrary. We cannot understand why there should be such a lower limit as the expenditure will have to be "audited" before relief is available. Thus the amount spent will be bona fide and should be subject to relief.
The proposed system for providing the relief is welcome and if put into effect will provide genuine relief for the incurred expenditure.
Chapter 2 - Qualifying Criteria
We have already stated our views on this subject in our comments to chapter 1. However we would reiterate our objection to a de-minimis limit. Certainly if compliance costs are a concern, which should be kept to a minimum in any case, then it is the choice of the business to seek the relief. We cannot see any reason for restriction of the relief if it is voluntary.
Joint-Ventures
Where a joint-venture is conducted through a limited company there should not be any reason for the relief not being available. The relief should not be restricted with reference to the shareholders in the joint venture company not being corporates.
Chapter 3 - Qualifying Expenditure
Territorial Limitations
The current non-territorial nature of SRA feeds through into benefiting the UK business base by allowing the most appropriate global research location to be selected and thus providing the most cost-effective environment for these business operations. The Government should not use this consultation exercise as an excuse to restrict that allowance.
The proposed new R & D relief and the restrictive way in which it is to be provided is likely to mean there would be very little non-UK expenditure, as SMEs are generally domestic territory focused in their activities. We consider the R & D allowance could be unnecessarily complex and restrictive in attempting to combat a scenario which is very much the exception and could lead to relief not being available, or restricted, in some instances.
Revenue expenditure
This is an example of offering a relief and then seeking to restrict its usefulness as much as possible. It will be difficult in some instances to embark on R & D without building capital infrastructure first. Under the current proposals the infrastructure may never obtain any form of relief against taxation. Clearly there is a desire, which is understandable, to seek to make the available funds stretch as far as possible and allowing structures into the scope of the relief could cause their very fast depletion. However, this must be gauged against the practical reality of undertaking research and development.
Simple measure of R & D revenue expenditure
The statement at 3.11 is incorrect. The provisions of SSAP 13 are in fact adopted within the Financial Reporting Standard For Smaller Entities (FRSSE) which presumably the paragraph is actually eluding to when it is stating that many SMEs do not adhere to SSAP 13. Although clearly SSAP 13 does not provide "absolute" definitions for classifying expenditure.
Generally speaking we consider the proposed R&D cost definition to be reasonable although, as already indicated, we do not consider its restriction to revenue costs only to be appropriate. We agree that the less adjustments there are the better and consider that overhead costs already attributed to the R&D cost centre should also be within the direct cost definition. This would be simple and in keeping with accounting practice.
What are direct staff costs?
By excluding capital items from the R&D definition the computation of the cost is likely to become unnecessarily complex as indicated in paragraph 3.16. We wonder whether the use of a de minimis rule as indicated in paragraph 3.19 may cause SMEs to be denied claiming bona fide expenditure as they may have a number of staff use only small amounts of their time in the R&D activity.
R&D for own benefit
The underlying theme of this consultation document is to provide help for SMEs without complexity yet the paper then proposes complexity at every opportunity. Paragraph 3.22 is just such an example of this. Clearly the paragraph is setting out anti-avoidance rules for the underlying legislation from the outset. It may be quite difficult to demonstrate the "own benefit" test for some aspects or forms of R&D, especially where there is a group the benefit could filter out to other companies external to that group.
Sub-contract costs
We are not entirely clear why only 65% of the contract fees would be considered R&D, other than it may approximate to the USA system. Although this may not be such a problem if there is still the option to elect the other system.
Grants and subsidies
The full R&D expenditure should not be excluded. It should only exclude expenditure to the extent of the value of the grant. Certification of expenditure We consider the certifier of the expenditure should be a registered auditor as defined under part II of the Companies Act 1989. This would provide much greater integrity for any claim.
Chapter 4 - The Proposed Tax Credit Scheme
How would the tax credit be given?
We consider the general proposal, under this heading, to be reasonable and uncomplex to calculate. How would companies claim the tax credit We agree that the claim for the tax credit should be through the self-assessment return. However we consider it is essential that there should be an advance clearance system available, which is dismissed in paragraph 4.8, that would provide assurance to the SME on the eligibility of the expenditure even before the business has made a commitment to undertake the work. Otherwise the SME could find itself going into liquidation if the relief is then subsequently refused.
Where the tax payer did not seek Inland Revenue clearance but went ahead with the expenditure considering that it should qualify then found it being rejected by the Inland Revenue, which could occur many years later under self-assessment, there should be the opportunity to refer the matter to a DTI specialist (referred to at paragraph 4.10) before moving to the formal appeals procedure. This may provide a fast track solution to disagreements.
Chapter 5 - Companies Not In Taxable Profit
We welcome the proposals in paragraph 5.2. We agree that the tax credit should be available for group relief and carry-forward. However, there should also be the full carry back facility that there is for ordinary losses. Apart from the additional relief this would provide the SME it would reduce complexity as the credit could then mirror fully the rules for ordinary Corporation Tax losses.
The Emerging Growth Rebate
We are not entirely clear as to why the linking of the tax credit to the PAYE system would be too complex. However, we consider the cash rebate of the tax credit is likely to prove even more effective.
A payment scheme based on the R&D tax credit
As stated above we support a scheme offering a cash rebate for the tax credit as outlined in 5.8. We agree that there needs to be a reasonable level of "compliance assurance" under a tax credit refund system and we would reiterate our comment above that a registered auditor should be required to certify the expenditure. Therefore very little additional enquiry into the expenditure should then be required by the Inland Revenue.
Surrender of enhanced R&D component of taxable loss
We have already expressed our disagreement with the de minimis limit, otherwise the proposals within this section are reasonable.
Discount
We consider that the discounted tax credit payment system fails to appreciate the problems for SMEs in their requirement for cash-flow. By not repaying a higher value to SMEs the tax credit rebate may not address the funding issue and hence fail to improve R&D in that sector. The Government needs to take a more pragmatic approach on this matter.
Chapter 6 - Scientific Research Allowance
We have already expressed our concern at any curtailment of the current SRA. The allowance is for a very specific targeted form of research, which is generally high risk with long lead times. The associated capital expenditure is all a part of the necessary costs of undertaking this type of research and any curtailment or reduction of its scope is likely to be counter productive in the long-term to the pursuance of this area of work.
The suggestion that there should be some restriction on the allowance for office accommodation demonstrates a lack of understanding of the underlying commercial workings of a business. There has to be non-scientific elements which are required to facilitate the scientific work.