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KTPs and R&D Tax Credits
I've run across a few clients operating KTP arrangements recently, and found that the advice on claiming R&D tax credits in relation to the programmes was confusing or non-committal. It actually isn't that complicated, so I thought I'd put a short note together explaining how to go about including KTP arrangements in your R&D tax credit claims. Knowledge Transfer Partnerships or KTPs are a long established mechanism for collaboration between universities and companies, supporting innovation and transfer of capabilities from universities to companies and allowing graduates to get work in industry whilst still receiving academic support.
The first area of confusion relates to state aid, as in a typical KTP arrangement, the costs of a team member (maybe a graduate or PhD student) are paid by the company, but with the university contributing 33% - 50% of the total. As the university is state funded, it is often believed that this will disqualify the project from the SME scheme for R&D relief, and move the project into the large company scheme, which is considerably less generous.
Thankfully this is not the case, as the company does not directly receive any state aid, and the team member is actually on the payroll of the university. Therefore, as long as there is no intermediary involved (e.g. a personal service company) the costs paid by the company to the university can all be treated as a payment for an externally provided worker.
Normally this would allow a company to include 65% of the cost in their R&D tax credit claim, alongside any other costs of the project in the usual manner. There is a way to increase this however, although this will depend on co-operation from the university. If the university provides a letter detailing the actual salary costs of the individual concerned and agrees to be treated as a "connected party" for the purposes of R&D tax credits them the full amount of the costs to the company can be included, which can increase the value of the tax credit by over 50%!
Here's a quick example to show you what I mean: Let's take a small company engaged in a KTP, where a team member is provided with 50% of costs paid by the university. I'm using the pre-April 2015 tax credit rates for simplicity.
- Total cost of staff member: £40,000 (including salary, benefits and other costs)Company is invoiced £20,000, and the team member spends all their time engaged in developing an innovative new product with the company.
- Company is invoiced £20,000, and the team member spends all their time engaged in developing an innovative new product with the company.
Without co-operation from the university, £13,000 can be included in the R&D tax credit claim, which would be worth up to £3,250 in tax savings or up to a £4,241 payable credit in a loss making company.
With co-operation from the university the lower of the cost of the staff member or the cost to the company can be included, which in this case would be £20,000. That would be worth up to £5,000 in tax savings, or up to a £6,525 payable credit.
I hope you find this useful. If you'd like to take things further and have WOCO handle the whole process for you (including the dealing with the university and writing the full R&D report for you), get in touch at email@example.com or call 07752 057553.