Research & Development tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by either reducing a company’s liability to corporation tax or by making a payment to the company.
Activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are considered R&D. There are tangible consequences like new or more efficient products/processes as well as intangible outcomes such as new knowledge or cost improvements. Your project does not have to be successful to claim research and development relief.
The latest available figures from HMRC show that £4.3bn of R&D tax relief support has been claimed for 2017-18, corresponding to £31.3bn of R&D expenditure. However, many businesses are not claiming R&D simply because they do not realise that they could qualify.
There has been a stark increase in the number of SME claims in recent years, which is likely due to the effect of changes made to the SME scheme from April 2012 onwards, and to some degree, increased awareness.
Awareness is a significant problem in Cornwall and something which we are seeking to address with our clients and all businesses that we correspond with. We often find when engaging with new clients that they are surprised to discover that work they have been carrying out may be eligible for R&D tax credits, as they simply have not previously been advised as such.
The removal of the requirement for a minimum R&D expenditure of £10,000 has meant that more companies are eligible to apply for the relief. In the same year, the PAYE cap was removed, opening up the scheme to more users.
There have also been increases in the SME enhanced expenditure rate, including a rise from 125% to 130% in 2015-16. These changes, together with an increase in the SME payable tax credit rate from 11% in 2012-13 to 14.5% in 2014-15, have made the scheme much more attractive.
What qualifies for R&D tax credits?
The project you’re making an R&D relief claim for must be part of your company’s trade. This includes either an existing trade or one that you intend to start up based on the results you acquire from your R&D.
The relief relates to ‘qualifying’ expenditure on such things as:
- Staff costs (salary, employer NIC & employer pension contributions)
- Software and consumables
- Relevant payments to the subjects of clinical trials
- Sub-contracted R&D costs
- Externally provided workers
To get the relief you are required to explain how a project completed the following:
- Looked for an advance in science and technology
- Had to overcome uncertainty
- Tried to overcome this uncertainty
- Couldn’t be easily worked out by a professional in the field
The main type of R&D relief claimed in the UK is small and medium-sized enterprises (SME), the conditions to qualify as an SME are as follows:
- Fewer than 500 staff
- A turnover of under €100m or a balance sheet total of under €86m
SME R&D relief allows companies to do the following:
- Deduct 130% of their qualifying costs from their yearly profit in addition to the normal 100% deduction to make a total of 230%
- Claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss (being the lower of qualifying R&D x 230% and trading losses after deductions). This option has become more attractive in recent years due to the reduction in the rate of corporation tax.
There are also allowances which can be claimed against your research and development capital expenditure, these are:
- 100% first-year allowances (FYA) in plant and machinery additions which is different to annual investment allowance (AIA)
- FYA is also available at 100% for capital expenditure on buildings which house R&D projects
The amount of companies claiming the R&D relief is progressively more each year, however, there are still a considerable amount of companies not claiming in the UK.
We are helping a range of businesses across the UK to understand if they qualify for any of the various R&D schemes. We analyse and prepare such claims, as well as making sure our clients are effectively claiming the appropriate reliefs and allowances.
This publication has been prepared by RRL LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.