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 2012, the tax relief on allowable R&D costs has been 225% (increasing to 230% from 1 April 2015) – 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 £125 (£130 from 1 April 2015) 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 loss for expenditure incurred after 1 April 2014 (11% prior to this).
The Large Company Scheme
From 1 April 2008, the tax relief on allowable R&D costs is 130% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which CT is paid reduced by an additional £30 on top of the £100 spent. If instead there is an allowable trading loss for the period, this can be increased by 30% of the qualifying R&D costs – £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
For accounting periods ending before 1 April 2012, tax relief was only available if you spent at a rate of at least £10,000 a year on qualifying R&D costs.
From 1 April 2013, the Above The Line (ATL) Credit was introduced to increase the visibility of R&D tax relief. This is currently optional, but the Above the Line Scheme will become mandatory from 1 April 2016, entirely replacing the 130% enhanced-deduction scheme.
The scheme gives a tax credit, equal to 10% of qualifying R&D expenditure, that will appear as additional pre-tax income in the company accounts, and therefore will be subject to corporation tax. The company’s Corporation Tax liability is calculated on a higher taxable profit, but relief is given for the 10% credit against the Corporation Tax liability. This gives greater relief than under the existing enhanced-deduction scheme, so companies may wish to start using the scheme before it becomes mandatory.
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.
If you’ve spent money on something 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.
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