R&D Tax Credits are a valuable Corporation Tax relief, but despite having been available to companies for over a decade, they are often overlooked by many eligible businesses.
There is a common misconception that the R&D tax credit scheme is only available to high-tech companies with dedicated research teams, but this is not the case. R&D covers a broad range of activities and relief could potentially be available to any company that develops new products, technologies or processes.
Moreover, it is not just the creation of new products or processes that may qualify for relief under the scheme. Projects that make an appreciable improvement to an existing product or process may also qualify, as might the duplication of existing products or processes in a new or improved way.
In order for a project to qualify for the relief, it must be able to demonstrate “an overall advance in science or technology, through the resolution of scientific or technological uncertainty”. This can occur whenever a company faces a technical problem, the solution to which is not readily available or deducible by a ‘competent professional’ working in the field. That ‘competent professional’ need not be a highly qualified scientist if that would not be typical of your industry.
There are two schemes for claiming relief, depending on the size of the company: those that meet the European definition of a small or medium-sized enterprise (SME), may, in most cases, claim under the SME Scheme; whilst larger companies and SMEs undertaking subcontracted or subsidised R&D may claim under the Large Company Scheme.
For the SME Scheme there is no minimum expenditure requirement and relief is given either by enhanced relief of 225% of qualifying expenditure if the company is profitable or by means of a repayable tax credit of 14.5% (from 1 April 2014) for loss making companies (which equates to a cash repayment of just over £32 for every £100 spent on qualifying R&D expenditure).
For the Large Company Scheme, enhanced relief is given at 130% of qualifying expenditure but there is no repayable tax credit if the company is loss making. Instead those using the Large Company Scheme can surrender losses in exchange for a 10% payable credit under the new ‘Above the Line Scheme’. The credit will appear as additional income in the company accounts but relief is then given against the Corporation Tax liability. The repayable credit must first be offset against other liabilities due to HMRC before being paid to the company. The “Above the Line Scheme” is currently optional but will become mandatory from 1 April 2016, entirely replacing the 130% enhanced-deduction scheme.
To qualify for additional relief at 225% or 130%, expenditure must not be capital in nature and must be from one of the following revenue categories:
• Staffing Costs – including gross salaries, bonuses, Employers’ Class 1 NICs and pension contributions;
• Consumables and Software – including water, fuel and power costs;
• Externally Provided Workers – e.g. agency staff and staff employed by other group companies;
• Subcontracted Activities – note that large companies will only qualify for relief under this category if subcontracting to certain qualifying bodies.
(Accounting rules sometimes give the option to capitalise in the accounts what is normally thought of as revenue expenditure; such capitalisation does not prevent an enhanced deduction being claimed).
Genuine capital expenditure incurred for the purpose of R&D (for example on equipment), although not eligible for enhanced relief, may qualify for a 100% deduction in the Corporation Tax computation in the year in which the expenditure is incurred.
This is a very brief outline of a complex relief. It is therefore important that a claim is put together carefully with suitable professional advice. Claims are made on the company’s Corporation Tax Return, and must be made within two years of the end of the relevant accounting period.
R&D Tax Credits could make a significant impact on the tax position of companies undertaking R&D, but many miss out because they do not fully identify those activities or costs that qualify for relief.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.