Comments on: So refreshing to see someone telling the truth

By: Laurinda Seabra

Laurinda Seabra — Tue, 10 Aug 2010 10:32:33 +0000

I agree with Richard.

Often, and I have seen it happen in South Africa … production items are indeed allocated to R&D expenditure (in large organisations) … especially just before a product goes live! I.e. I designed a wheel for x application … proof of concept is finished, we now starting the first production run … instead of this run being allocated to normal operations it get allocated to R&D …

then 1, 2, 3 years down the line … under the guise of continuous improvement … some runs which are sold at market prices, its costs are allocated to R&D …

There is even a name for that … “Project acceleration budget” … in this budget you allocate, fictitious R&D costs, bribes, etc …

But you seldom find this happening in smaller manufacturers … if for no other reason than there isn’t enough “space” to do that. So the disparities between large and small continues … often enabling large organisations to gain unfair competition … not to mention defaulting on contributions to the fiscus …

By: Micah Levy

Micah Levy — Wed, 14 Oct 2009 16:53:27 +0000

Richard,
Certainty is not the main issue – see above – but is still important as if the scheme is intended to incentivise additional amounts of R&D, companies will only make these extra investments if they know they are going to reap the benefits. This was recognised by HMRC when they set up specialist R&D centres http://www.hmrc.gov.uk/randd/special-units.htm and from Gordon Brown when the scheme was set up http://www.hm-treasury.gov.uk/press_84_03.htm
“The Government introduced R&D tax credits in recognition of the importance of innovation for driving up the UK’s productivity. They have been welcomed by businesses because they provide a real incentive for additional R&D spending. We now intend to build on the success of R&D tax credits by ensuring that the definition of R&D provides businesses with the clarity and certainty they need.”

By: Richard Murphy

Richard Murphy — Tue, 13 Oct 2009 08:43:54 +0000

Micah

Please tell me what is certain in your life?

I guess the sun will probably come up tomorrow – but I can’t guarantee it

So why must tax have a property nothing else, and no form of words, can ever deliver?

Richard

By: Micah Levy

Micah Levy — Tue, 13 Oct 2009 08:26:41 +0000

Although tax may be a national issue, R&D is global and the tax system just happens to provide a fairly efficient means for the UK to subsidise the cost of R&D, thereby increasing the amount of R&D performed by UK companies.

A bit of background info first: why is R&D incentivised at all? In economic terms, R&D suffers from what is known as imperfect appropriability. In other words, the Private Rate of Return (PRR) of R&D, which is the benefit that the company performing the R&D gets, is less than the Social Rate of Return (SRR) which is the benefit that accrues to the rest of the economy. Left to their own devices, therefore companies will only perform enough R&D to achieve the PRR rather than the optimal (for the general economy) SRR.

The purpose of the R&D scheme is to close the PRR-SRR gap by incentivising more R&D to be carried out.

If not all R&D is incentivised then the UK will not reap the social benefits of R&D carried out in those areas. This is bad for the UK economy as a whole. And let’s not forget that the definition of R&D is one that is defined by the OECD and provides a global benchmark (see the Frascati Manual)

On a final note, R&D is a business activity the majority of which is carried out in the main by a relatively small number of global multinationals. For the scheme to be successful in the UK, and for companies to utilise it, it needs to provide certainty which currently, although having undergone great improvements since its inception, it does not.

By: Richard Murphy

Richard Murphy — Wed, 07 Oct 2009 14:18:28 +0000

Micah

Of course it could also just be right

Why does the HMRC scheme have to be like everyone else’s? Tax is national.

You have not made your case as yet

Richard

By: Micah Levy

Micah Levy — Wed, 07 Oct 2009 13:57:28 +0000

Richard,
Of course the rules should be complied with – and no one has an issue with that. The problem here is that the statutory guidance is ambiguous and can be interpreted in different ways. The way in which HMRC are choosing to interpret it is at odds with what is common practise in other R&D regimes around the world, and can be seen as going against the ‘spirit’ of the legislation if not the letter.

The article in question labelled those who do not interpret the legislation in the same way as HMRC as ‘trying to exploit the system’ though which just seems like some cheap point-scoring.

Micah

By: Richard Murphy

Richard Murphy — Tue, 29 Sep 2009 19:39:09 +0000

Micah

But all the people in the FT are saying is the rules should be complied

I am applauding them for doing so

What is wrong with complying with the rules – whether you like them or not?

Richard

By: Micah Levy

Micah Levy — Tue, 29 Sep 2009 18:21:50 +0000

Don’t agree with this article and the comments from Richard are on this occasion misguided. Look at every other significant R&D incentive regime – the US, Canada, etc. In all of them the cost of prototypes that are later sold can attract R&D tax relief if they are effectively ‘experimental production’- something that has been established by extensive case law in those regimes over the past 20 years.

No one is talking about claiming R&D tax relief on standard production runs but the position of HMRC is that anything which is ever sold cannot attract the relief.