For a large company, R&D allowances are an additional 30 percent deduction for qualifying revenue expenditure and a potential 100 percent allowance on any capital expenditure. There is also current consultation regarding an above-the-line (“ATL”) tax credit, which is proposed to apply for accounting periods beginning after April 2013. The ATL credit will be set at a minimum of 9.1 percent on qualifying expenditure and will be capable of being turned into ‘cash’ by loss-making companies.
Significant expenditure is currently being incurred on regulatory systems in the insurance industry and a significant proportion of these costs may qualify for R&D tax relief. For example, we expect that, as a minimum, there may be expenditure in the following types of Solvency II work streams that would qualify as R&D:
- Data governance,
- System architecture, and
- Financial reporting.
R&D is not restricted to just rocket science. Activities like customising, enhancing and integrating existing software packages can and have qualified for R&D relief.
KPMG often finds that companies do not make claims, erroneously assuming for example that software-related projects will not qualify for R&D. Alternatively, companies often make their own claims which, over time, drift away from the tax definition of R&D, resulting in undervalued claims.
There is also a historic issue in the insurance sector, with many groups choosing not to make R&D tax relief claims due to existing tax losses either eliminating the potential benefits or moving the benefits a long way into the future.
The announcement of the ATL tax credit should help to alleviate these concerns and, along with the ever increasing spend on systems developments driven by Solvency II and other regulatory programs, this should cause insurance firms to seriously (re)consider the benefit of making a claim.
- Before anything else, companies should understand their tax profile, i.e. which companies in the group are incurring expenditure and what are the tax implications of making an R&D claim in those companies.
- Companies should then identify the expenditure made on systems development in their recent accounting periods (there is a two- year time limit for making claims) and assess how much of this may qualify for R&D tax relief.
- Loss making companies, where the ATL credit will provide an incentive to make a first claim, should commence the preparation process now. There can be significant benefits to preparing claims in advance of the new regime.
- All companies potentially affected by the ATL regime should review the consultation document and feed in any comments to HMRC/ Treasury.
Our IT and tax specialists, working closely with the project/ implementation/ tax teams in an organisation, can determine which projects are likely to qualify for relief. This then naturally leads on to a cost/ benefit analysis of making a claim.
If you have not been making R&D claims so far, now is a good time to consider whether you are entitled to claim R&D tax relief and/or how to identify and cost R&D in the most efficient way. This is especially important for life insurance groups where the benefit of the claim may be different depending on whether the expenditure is incurred in the life company, service company or elsewhere.