Knowledge Transfer Partnerships and their impact on R&D tax relief claims

Getting highly qualified and well-informed new talent into a business can not only help take that business forward, it can also qualify companies for generous tax relief. This month we’re taking a closer look at Knowledge Transfer Partnerships (KTPs), explaining what they are, how they work — and most importantly how they can deliver tax savings. What is a Knowledge Transfer Partnership (KTP)? A Knowledge Transfer Partnership (KTP) is a scheme designed to help businesses improve their performance and make them more competitive by allowing them to harness external academic expertise. This can give participating companies the benefit of fresh knowledge and technological insight from an external partner, typically a university or college. In order to form a KTP, two partnership organisations come together and arrange for a highly-trained individual to assist on a specific new project. So the participants are: 1. A Business: the applicant company wanting assistance in undertaking a new project. 2. A Knowledge Base: the academic or research organisation that will assist the business by identifying a suitably skilled graduate or other expert. 3. An Associate: The graduate themselves, equipped with the necessary education, training and skill set to lead the new project. The reason it is a partnership is because the company doesn’t employ the expert directly. The university or college will employ the expert but arrange for them to work with the business for the duration of the KTP project. In practice, this scenario will often lead to the offer of a permanent role within the business. Do KTPs qualify for R&D tax relief? In short — yes. As long as the KTP project qualifies as R&D, then the costs incurred by the company in the partnership can be included in a claim. Generally, the company funds 33% of the project's costs, with the balance being picked up by Innovate UK, the government agency created to boost technology and skills. Only grants classified as 'notified state aid' interact with the qualifying costs of an R&D tax relief claim, reducing the ultimate benefit. Fortunately, KTPs are not usually classed as notified state aid, in which case there is no impact on a claim but, as always, it’s best to get an expert to check each individual arrangement. What value can KTP costs add to the KTP claim? Typically, participating SMEs will contribute around £35,000 per year, which is paid directly to the Knowledge Base organisation (i.e the partner university or college). This is classed as third-party expenditure for R&D, which means the qualifying cost is capped at 65%. So a contribution of £35,000 to the KTP would result in a qualifying cost of £22,750, representing up to £7,575 in tax benefit. There is one alternative to this arrangement. The business can instead elect to treat the Knowledge Base as a connected party, something which requires the consent of the academic organisation. If taking this path, costs are no longer capped at 65%. In this scenario, the client's benefit subsequently increases to £11,655 — a 12% higher rate of return on expenditure compared to claiming for the KTP cost as unconnected. So what are the key takeaways on KTPs? If a client is seeking out a specific skillset from an academic to lead a project, this would be a good indicator that they are performing the sort of R&D that would qualify for tax relief. The two main priorities for an accountant would be to ensure that any KTP doesn’t fall foul of state aid rules, and to advise on whether the business is better off making their partner institution a connected party. Uzair Ishtiaq, Specialist Tax Consultant at business tax relief consultancy Catax