R&D Tax Relief – what you need to know

R&D Tax Credits – Further information

Do you qualify?

Qualifying R&D activity can be undertaken in almost any industry.

However, it is often unclear to businesses whether an activity constitutes qualifying R&D – this is where we can help. We will explain the definition of R&D for tax purposes, how HMRC interpret it, and discuss with you how this relates to your activities.

If you can answer ‘yes’ to any of the following questions then R&D Tax Reliefs may be available to your company:

  • You have developed (or attempted to develop) any new products, processes or systems;
  • You have made any improvements to existing products, processes or systems;
  • You have undertaken any other system, product or process development;
  • You encountered uncertainty in attempting to achieve any of the above – i.e. perhaps your technical team knew what you want to achieve but needed to consider and analyse different solution options before arriving at the most suitable answer.

 

Claim deadline

Companies have 2 years from the end of an accounting period in which to make a claim for R&D Tax Reliefs. We are able to prepare claims very quickly, particularly where the 2 year deadline is fast approaching! However, we would highly recommend that you start the substantive claim process at least 6 weeks before the deadline date.

Why claim – the benefit of R&D Tax Reliefs

SME v. Large

The cash benefit a company receives from claiming R&D Tax Reliefs depends on whether it qualifies as a Small or medium sized enterprise (‘SME’).

A company will qualify as a SME if it is an independent enterprise and:

  • it has less than 500 employees; and EITHER
    • Annual Turnover < €100m; OR
    • Balance Sheet assets of < €86m

It can be complex to determine whether a company is an SME as the wider group and investors also need to be considered. In particular, the ownership structure of the company must be examined and a proportion of the results of any enterprises which hold 25% or more of the share capital must be added together before the above thresholds are tested. There are exclusions and each case should be examined before the claim is made.

SMEs

If your company qualifies as an SME it will receive an additional 130% corporation tax deduction (or 125% for expenditure incurred before 1 April 2015). The cash benefit your company receives from making the R&D claim will depend on whether it is profitable or loss making, as shown below:

SME regime Profitable Loss making
Cash benefit 26% 33%
Based on:
Qualifying expenditure £100,000 £100,000
Enhanced deduction £130,000  
Losses surrendered   £230,000
Tax Relief surrender rate 14.5%
Corporation tax rate 20%  
R&D Tax Relief £26,000 £33,350

Profitable companies

Profitable companies gain a cash benefit from using R&D Tax Reliefs to significantly reduce their corporation tax bill.

Loss making companies

As above, loss making companies are able to surrender the full 230% (225% pre 1 April 2015) for cash. The cash credit rate paid on the surrender of these losses is currently 14.5%.

Qualifying expenditure for the purposes of R&D Tax Reliefs is detailed below.

Large Companies

Companies which do not meet the above SME criteria are classified as ‘Large’ and can claim under the Large Company R&D regime. Until 31 March 2016 these companies can claim either a 130% tax ‘super deduction’ against qualifying R&D expenditure, or, for expenditure incurred after 1 April 2013 the new Research and Development Expenditure Credit (‘RDEC’). Given recent rate changes, in practice the RDEC is now almost always the preferred option.

Large Company regime RDEC Enhanced deduction
  (available from
1 April 2013)
(available until
31 March 2016)
Cash benefit 8.8% 6%
     
Based on:    
     
Qualifying expenditure £100,000 £100,000
     
Research and Development Credit
(‘RDEC’) (11% from 1 April 2015)
£11,000  
     
Enhanced deduction   £30,000
     
Corporation tax rate
(1 April 2015 onwards)
20% 20%
     
RDEC/Cash Benefit £8,800 £6,000
     
Cash credit for loss
making companies

The exact rate of cash benefit available depends on the period for which a claim is being made, due to changes in the prevailing corporation tax rate.

Qualifying costs

So, you think that your company might be doing R&D, but what are the costs that can be included in the claim?

Although the SME and the Large Company regimes are very similar, and they share the same definition of qualifying R&D, the costs which can be included in an R&D claim differ slightly different depending on which regime you fall into, as follows:

SME claim

  • Staffing costs – including pay, employers’ Class 1 NICs, payments to pension funds and reimbursed expenses. It does not include benefits in kind or Class 1A, 1B NIC on benefits.
  • Consumable or transformable materials – including the cost of materials and equipment used up in the R&D activity. It also includes spend on power, fuel, water and software used for R&D. It does not include rent, rates, interest on lease payments and capital items.
  • Externally provided workers – in certain circumstances, payments to agencies or group employment companies may qualify.
  • Subcontracted R&D – payments for work subcontracted to a third party may qualify.

Large Company (or RDEC) claim

  • Staffing costs including pay, employers’ Class 1 NICs, payments to pension funds and reimbursed expenses. It does not include benefits in kind or Class 1A, IB NIC on benefits.
  • Consumable or transformable materials including the cost of materials and equipment used up in the R&D activity. It also includes spend on power, fuel, water and software used for R&D. It does not include rent, rates, interest on lease payments and capital items.
  • Externally provided workers – in certain circumstances, payments to agencies or group employment companies may qualify.
  • Payments to qualifying bodies – payments to specific bodies (e.g. universities, individuals) may qualify.

For more information, contact Gillian Abramson on:

Tel: 0113 827 2410 or 020 7655 6959
Email: gillian.abramson@taxadvisorypartnership.com