The courts continue to find in favour of HMRC in cases involving avoidance schemes, with the most recent example being Vaccine Research Limited Partnership and another v CRC at the Upper Tribunal.
With so many cases going against such scheme providers, questions are raised as to whether the various new powers that HMRC is seeking on avoidance and other matters are really necessary? Perhaps using the existing HMRC powers to more effectively challenge such schemes is all that is really needed.
Vaccine Research Limited Partnership and another v CRC
The case in question concerned an R&D avoidance scheme, with a partnership being established in Jersey. The taxpayer partnership entered into an agreement whereby it paid another entity, Numology Ltd, £193m to purportedly carry out research and development (R&D).
Numology paid a very small proportion of this (£14m) to a subcontractor, PepTCell, who actually undertook the work and then contributed £86m to the taxpayer business itself. The partners claimed for a loss of £193m in respect of R&D capital allowances.
The Upper Tribunal unheld the First-Tier Tribunal’s decision, finding that the funds were put into an artificial loop and effectively only the £14m paid to the subcontractor was genuinely incurred for R&D. The Tribunal noted that the FTT was right to conclude “that Numology Ltd’s contribution represented funds put into a loop as part of a tax avoidance scheme, and [was] not in reality spent on research and development”.
The evidence of recent case law suggests that the existing provisions available to HMRC are sufficient to close down avoidance schemes and yet they continue to seek new powers in the name of cracking down on tax avoidance. It is concerning that HMRC continue to amass new powers, such as attempting to take funds directly from bank accounts and issuing non-appealable tax demands, on the premise that they are needed when it appears that they are not. Please feel free to share your own thoughts below.
According to a recent study by Chantrey Vellacott DFK Accountants, only 17,000 out of 150,000 potentially qualifying companies that undertake research and development activities are making claims for R&D tax relief.
It is suggested that the low take up of R&D tax relief may be as a result of a misconception that R&D only takes place in laboratories, which means innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media, can be easily missed.
Companies that undertake qualifying R&D expenditure are eligible for an enhanced Corporation deduction equal to 225% of the R&D expenditure for SMEs and 130% for large companies.
If an SME makes a loss and incurs R&D expenditure in the year, it is possible to surrender some of the loss for tax credit payment equal to 11% of the lower of 225% of R & D expenditure and the loss.
Therefore these reliefs are extremely beneficial for the companies involved.
If you would like more information on R&D tax reliefs including details of what qualifies as R&D please contact a member of the Eaves & Co team.
A recent Eaves and Co project involved helping a client prepare a claim for their Research and Development (R&D) Expenditure. Small and medium companies are able to benefit from a deduction of 200% (2011/12) and 225% (2012/13) of the qualifying expenditure.
The initial stage in the process was determining whether the research and development undertaken qualifies for a claim for a deduction from their taxable profits. In order for the expenditure to qualify, the research and development undertaken must aim to solve a scientific or technological uncertainty and not just find evidence to support previous conclusions. We interviewed the individual who is responsible for R&D and formed a ‘product matrix’ of all the products worked on and why the work qualified as R&D.
Once it had been decided that the client’s research and development qualified for the deduction, Eaves and Co gathered the information required, for example expenditure on gas, water and electricity as well as staff costs and materials specifically relating to the research and development undertaken.
The next step involved determining whether the client would be classed as a large or small/medium company and calculating the tax reduction/saving that they would benefit from. This entailed applying the company in question to the legislation on R&D in areas such as the criteria for small and medium companies and the criteria surrounding the number of employees, and the annual turnover and balance sheet figures.
The final part of the project involved the preparation of the R&D calculations and the supporting paperwork to the claim. This also involved liaising with the company’s accounts department and auditors to ensure that the claim was reported in the correct manner.
On this occasion, Eaves & Co were able to help the client save nearly £60,000 in their R&D claim.
The Budget announced some significant and beneficial changes to R&D Tax Credits:-
– The rate of credit available has been significantly increased
-More companies will be able to access credits as the lower spending threshold is removed
However, what is also important for innovative companies is the new “Patent Box”
This is a 10% rate of tax for companies after April 2013 on patents that are brought into use now
For more information call Eaves & Co Leeds, on 0113 2443502