Generous tax reliefs are available for businesses with Research and Development costs.
There are two schemes for claiming relief, depending on the size of the company or organisation: The Small and Medium-sized Enterprise (SME) Scheme and The Large Company Scheme.
You can’t claim R&D Relief under the SME Scheme if you are a subcontractor – that is, if you have been subcontracted to do the work on behalf of somebody else. But, even if your company is small or medium-sized, you may still be able to claim, as a subcontractor, under the Large Company Scheme.
The Small and Medium-sized Enterprise (SME) Scheme
This scheme has higher rates of relief than the Large Company Scheme. From 1 April 2015, the tax relief on allowable R&D costs has been 230% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which CT is paid reduced, or its trading loss increased, by an additional £130 on top of the normal tax relief for the £100 spent.
A loss resulting from R&D relief can be carried forward in the normal way, but only if you choose not to convert it to tax credits.
If your company makes a loss, it may be able to receive your tax relief by way of tax credits – a cash sum paid to you by HMRC. The tax credit is paid at 14.5% of the R&D loss, which is the loss arising from the qualifying R&D expenditure, plus the 130% additional relief received under the scheme.
The Large Company Scheme
The large company R&D scheme works on a different basis, giving the company an “above the line” R&D expenditure credit (RDEC) of 12% of qualifying expenditure (11% prior to 1 January 2018).
The RDEC amount appears as additional pre-tax income in the company accounts, and is therefore subject to corporation tax. The company’s Corporation Tax liability is calculated on a higher taxable profit, but relief is given for the 12% credit against the Corporation Tax liability.
For example, a large company with £100,000 of qualifying R&D expenditure will receive a RDEC of £12,000. This will be subject to corporation tax at 19%, along with the other profits of the company (tax of £2,280), but the £12,000 RDEC will also be deducted from the overall corporation tax charge, giving net relief of £9,720 of corporation tax.
What Qualifies as Research & Development?
Your company or organisation can only claim for R&D Relief if an R&D project that is related to your company’s trade seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.
Determining what constitutes such an advance is a complicated area, and we would recommend seeking professional advice as to whether your project qualifies.
Costs Qualifying for Research & Development Relief
To qualify as R&D, any activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity. If your company and the project both meet the necessary conditions, then you can claim tax relief on revenue expenditure (generally, this means costs incurred in the day-to-day running of the business – not capital expenditure on assets) in the areas outlined below, if all necessary conditions are met.
- Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company or organisation.
- Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D.
- Materials – consumable or transformable materials used directly in carrying out R&D.
- Payments to clinical trials volunteers.
- Utilities – power, water, fuel used directly in carrying out R&D, but not things like telecoms costs and data costs.
- Software – computer software used directly in the R&D.
- Subcontracted R&D expenditure – if your company or organisation is claiming relief under the SME Scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor.
- Capital expenditure – Although R&D Relief is only available for revenue expenditure, if you are involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances. This is broader than the normal plant and machinery allowances – if you are building an R&D facility then the capital costs of the structure could receive allowances wher they would normally be ineligible for relief.
If you’ve incurred qualifying expenditure partly for R&D, such as staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.
When to Claim Research & Development Relief
You must make any claim for R&D Relief in your Company Tax Return or amended return. The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period.
Tax Innovations has helped a variety of companies successfully claim Research & Development Relief on their relevant costs. If you would like further information on whether you can claim relief for your research and development costs, or any other tax relief, please email firstname.lastname@example.org or call us on 01962 856 990.