Research and Development Tax Relief
If your company is involved in research and development (R&D), the Government’s R&D tax credit incentive could provide a valuable source of tax relief. In order to qualify, a company must be subject to UK corporation tax and involved in R&D, which is the attempt to resolve technological or scientific uncertainty and incurring costs on these projects.
Even if your project was last year, it’s worth noting that a company has two years from the end of its accounting period to submit a claim for qualifying expenditure identified during that period. Therefore, returns already submitted without an R&D claim can be amended.
In the last tax year, 21,865 small and medium-sized enterprises (SMEs) made a claim for research and development tax relief, and the average amount of tax relief obtained was over £60,000. For R&D purposes, an SME is a company which has fewer than 500 staff, less than €100 million turnover and less than €86 million in gross assets. However, larger companies who exceed the above limits can still claim research and development tax relief, but at a reduced rate.
Whilst the number of businesses claiming research and development tax relief is on the up, there’s still work to be done as this valuable relief is under-utilised.
So What is R&D?
One of the biggest misconceptions is that research and development tax incentives are only for those who carry out scientific research in a laboratory. HMRC’s definition of R&D doesn’t help:
‘Research and development … takes place when a project seeks to achieve an advance in science or technology … through the resolution of scientific or technological uncertainty.’
This has created confusion because it’s not always easy to relate real projects to this terminology. What the definition really means is that, if a business isn’t sure whether a project is scientifically or technologically possible, or they don’t know how to achieve it in practice, it could be carrying out R&D. R&D can be found widely in various everyday activities dealing with manufacturing, engineering and software development, as well as the more commonly thought of areas such as the pharmaceutical and scientific sectors.
The definition, whilst confusing, is deliberately broad so that it can be applied to any industry, not just laboratory-based ones. As a bonus, the R&D project doesn’t need to have been successful to qualify for enhanced relief.
Why is the Relief so Beneficial?
In short, for every £100 spent on R&D, the deduction from the company’s taxable profit is £230. If your company has made a loss for the year then the full R&D credit of £230 can be surrendered for a repayment at a rate of 14.5%; i.e. cash in the bank of £33.35 for every £100 spent.
What Costs Qualify?
Broadly speaking, as long as a cost has a link to the R&D project being undertaken, then it will be a qualifying cost for the purposes of the tax relief. This incorporates:
- Staffing costs, including wages and salaries, employers’ National Insurance and employer pension contributions
- Consumable materials used up in the R&D process
- Utilities, including water, fuel and power
- Externally provided workers and subcontractor cost (claimable at 65%)
- Software costs
For the costs to qualify, the company must not have received any state aid for the R&D project. If a grant has been received then this can jeopardise the R&D claim (receiving a grant to cover your costs, and then obtaining valuable tax benefits as well, is too much like having your cake and eating it!). If you receive a grant to fund a project, you can still obtain tax relief, just at the reduced large company rate.
Our specialist tax team has extensive experience in appraising R&D projects and submitting R&D relief claims to HMRC.
If you have any questions or if you would like to discuss Research and Development Tax Relief with us in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Research & Development Tax team.
This article originally appeared on the blog of our member firm, Larking Gowen.