This is something that we find really interesting, government wants UK companies to innovate their way out of the downturn and are supporting this by providing R&D tax credits as a tax incentive that may reduce your company tax bill.
Your company or organisation can only claim R&D Relief if it is liable for Corporation Tax, and there are two distinct initiatives on offer. These are:
- The Small or Medium-sized Enterprise (SME) Scheme
- The Large Company Scheme
R&D for Small to Medium sized businesses (SMEs)
It is important that your business meets the criteria for SME, which as of 1st August 2008 is stated as:
A company or organisation with fewer than 500 employees and either of the following:
- An annual turnover not exceeding €100 million
- A balance sheet not exceeding €86 million
If your company belongs to a larger group or enterprise, it may not be considered an SME and subsequently fail these tests.
The Small and Medium sized Enterprise Scheme has higher rates of relief
From 1 April 2011, the tax relief on allowable R&D costs is 200 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £100 on top of the £100 spent. It also includes a payable credit in some circumstances.
Subject to Parliamentary approval, the rate will increase further to 225 per cent from 1 April 2012.
The Large Company Scheme
If your company exceeds the criteria for SME, then a claim is only possible under the Large Company Scheme.
Amount of expenditure for large companies
Tax relief is only available if you spend at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. The Chancellor announced in his Budget on 31 March 2011 that this limit would be removed for expenditure incurred on or after 1 April 2012. There is no upper limit.
Rate of tax relief
From 1 April 2008, the tax relief on allowable R&D costs is 130 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax 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 per cent of the qualifying R&D costs – £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
Which R&D projects might qualify for Relief?
HMRC have clearly defined R&D Relief in relation to a claim. If an R&D project 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…”
The project cannot simply advance the companies own state of knowledge or capability.
Furthermore, for accounting periods ending before 9 December 2009, the project must satisfy both of the following conditions:
- It must be related to your company or organisation’s trade – either an existing one, or one that you intend to start up based on the results of the R&D
- If your company or organisation is claiming relief under the SME Scheme, it must own any intellectual property that might arise from the project
How to show the project is R&D within the tax definition
There are guidelines that define all the following terms, and it’s important to understand these concepts before attempting to reach a view on whether your company or organisation has an R&D project for tax purposes.
- Project
- Advance in science or technology
- Science
- Technology
- Directly contribute
- Scientific or technological uncertainty
Costs that qualify for R&D tax credit
Costs will be involved in the delivery of the project and the following qualify for R&D relief:
- Employee costs – the employment of employees actively involved in carrying out R&D
- Staff provider – paying a staff provider for staff provided to the company directly engaged in R&D
- Materials – consumable materials directly involved in carrying out R&D
- Payments to clinical trials volunteers
- Utilities – power, water, fuel etc used in carrying out R&D – no phone or data costs can be included
- Software – applications involved in carrying out R&D
- Subcontracted R&D expenditure – potential for up to 65% of what is paid in R&D activity that is subcontracted
- Capital Expenditure – Potential for R&D capital allowances claim on capital assets
For all additional information and some useful calculations, more information is on HMRC: http://www.hmrc.gov.uk/ct/forms-rates/claims/randd.htm
Please get in touch with us for facilitation and recommendations on suitable delivery partners.
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