The common perception is that charities don’t pay tax so why is a tax relief, such as R&D Tax Relief, important to them?
It is certainly true that charities themselves are not eligible under the R&D tax relief rules; although for a while some universities and other charities made claims under the large company scheme – until H M Revenue & Customs changed the rules in 2015. However, the restrictions imposed by the change of rules do not impact charity trading subsidiaries.
Charity trading subsidiaries use donations to their parent charity under corporate “Gift Aid” to minimise profits that are subject to tax. It is common for these structures to allow a subsidiary to reduce its profits to nil.
If most charity trading subsidiaries can also mitigate tax completely through Gift Aid, why is R&D tax relief relevant at all?
The key is in the fact that both the R&D tax relief schemes; the Small and Medium Enterprises (SME) scheme and the large company scheme; offer the potential for a cash repayment and/or a reduction in the requirement to pay Gift Aid.
Funding of charity trading subsidiaries can be challenge, and where subsidiaries are funded by long-term debt (either external or from the charity) profits need to be retained in order to repay the debt. Needing to retain profits in a subsidiary to fund debt repayment or for other commercial reasons means that full Gift Aid cannot be paid, and tax liabilities are inevitable.
If a subsidiary is profitable, the R&D tax relief scheme for SMEs can reduce Gift Aid payments required by 130% of qualifying spend, allowing the subsidiary to retain profits to grow or reinvest in activities to generate further funds for the charity.
For the subsidiary of a large charity, the R&D scheme for large companies can reduce Gift Aid payments by 44% of the qualifying costs.
If the subsidiary makes a loss for tax purposes as a result of the R&D relief, both schemes also provide the opportunity to carry losses forward or to surrender the loss for a cash refund of either 33% (SME scheme) or just under 9% (large company scheme).
Research and development may conjure up images of laboratory coats and test tubes for some; but the availability of R&D tax relief is linked to innovation and in particular the seeking of an improvement to a product, process or system the solution to which requires resolution of a scientific or technological uncertainty.
We have worked with businesses across a wide range of sectors to make claims for innovative systems improvements or new processes. Charities need to be innovative in their operations to minimise costs and to maximise their social benefit and the opportunity to claim tax relief to increase the return on investment from a subsidiary that is raising funds for its parent should be considered.
If you would like to find out more about whether your charity’s trading subsidiary might be eligible for this potentially valuable tax-relief please contact Jon Sparkes.