The 2020 Finance Act and the consequences on the management of the Research Tax Credit schemes

A few days after the publication by the Ministry of Education, Research and Innovation (MESRI) of the 2019 edition of its RTC guide, the finance law for 2020 was promulgated.

It was expected as both the bill and the MESRI guide raised fears of a restriction in the implementation of Innovation tax incentives schemes (notably the RTC schemes and the Young Innovative Company status).

The suspense has finally been lifted and we will reveal below the changes incurred that shall be taken into account for expenses incurred as of January 1, 2020.

1) Decrease on overhead costs on staff expenses

On this point, the Finance Act confirms the position of MESRI, but postpones the date of application by one year as could be anticipated (calendar year 2020 and not 2019).

As a reminder, the overhead costs are calculated on a flat-rate basis as follows:

• Up to 50% of eligible staff costs
• Up to 75% of eligible depreciation and amortisation costs
• Up to 100% of the expenditure of eligible newly-hired PhD

The Finance Act 2020 makes a change only on the overhead costs calculated on the staff expenses by decreasing the rate from 50% to 43%.

Let’s take the exeample of a company declaring €200,000 in personnel expenses.

Until 2019, the overhead costs were therefore €100,000 (200,000 x 50%), for a total of €300,000 of eligible expenditure. Applying the 30% volume rate, the company could declare a €90,000 RTC.

From 2020 onwards, overhead costs will fall to €86,000 (200,000 x 43%), which will generate a total expenditure of €286,000 for a RTC of €85,800.

This change will lead in this case to a reduction in the RTC of almost 5%, in line with the average estimated by the French government that should allow to save approximately €230 million on yearly budget.

2) Restriction on the eligibility of certain subcontracting costs

In line with the new MESRI’s RTC guide, the 2020 finance law confirms the increasing restrictions of subcontracting costs eligibility.

As a reminder, the MESRI now differentiates between specialty subcontracting (in such a case the service provider is chosen for its scientific and technical skills that are not available to the client and allowing it to ensure the scientific coordination of the R&D operation) and capacity subcontracting (resulting from a simple execution of a request from the client who retains scientific coordination, without additional expertise from the service provider). It also completes the procedures for justifying the eligibility of the benefits retained in the RTC base.

The 2020 Finance Act also tightens the conditions for valuing subcontracting costs in RTC.

It therefore prohibits “cascade” subcontracting. In practice, the principal will henceforth only be able to retain for his RTC calculation costs related to R&D operations subcontracted to approved public or private entities only if such subcontractors directly carry out these R&D works. It will no longer be possible to deduct R&D operations that have themselves been subcontracted to a third party by the first service provider chosen by the principal.

3) Modifications in the reporting duties

Two changes have been made to the official reporting requirements:

The first one refers to the additional appendix mentioned in the 2019 Finance Act, which concerned companies reporting more than €2 million in qualifying expenditure. Historically, this 2069-A-1-SD appendix was only to be filed by companies reporting more than €100M of qualifying expenditure, but the 2019 Finance Act decreased this threshold to €2M, thus multiplying the number of newly concerned entities, before changing its mind in April 2019 considering the additional workload required for the tax authorities.

The threshold of this new appendix detailing additional information on R&D work (e.g. nature of the research work in progress and for which the company claims RTC, work in progress, material and human resources allocated and their location) was raised again in the 2020 Finance Act to the historical level of €100 million of qualifying expenses.

The second obligation concerns companies whose research expenditure is between €10M and €100M and which hire PhDs. This appendix must first mention the percentage of PhD holders financed by the said research expenses or recruited on their basis, then the number of corresponding full-time equivalents and finally their average yearly remuneration. Failure to comply with this reporting obligation will be subject to a fine of €150.

4) Prorogation of RTC and Young Innovative Companies schemes up to 2022.

The tax Incentive schemes for Innovation and Young Innovative Companies have been extended until 31 December 2022.

This additional period of 3 years will allow the Government to have a more significant feedback on the expenses incurred until December 31, 2022 to make a future decision on such schemes.

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