In 2000 the government introduced a scheme to encourage scientific and technological innovation within the United Kingdom.
R&D is a Corporation Tax (CT) tax relief that may reduce your company’s tax bill if your company is liable for CT or, in some circumstances, you may receive a payable tax credit.
For tax purposes, R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. R&D relief allows companies that carry out qualifying R&D related to their trade to claim an extra CT deduction for certain qualifying expenditure. The level of relief available depends upon which scheme the company uses.
The SME scheme
From 1 April 2015, the relief a company can get has increased to 230% on their qualifying R&D costs. Loss-making companies can in certain circumstances surrender their losses in return for a payable tax credit.
Research and Development Expenditure Credit (RDEC) scheme
The Research and Development Expenditure Credit (RDEC) scheme was introduced in the Finance Act 2013 for larger companies. From 1 April 2015 a taxable credit is available at 11% of qualifying R&D expenditure for large companies. For loss making companies the tax credit is fully payable (subject to certain restrictions).
Companies with no CT liability will benefit from RDEC either through a cash payment or a reduction of tax or other duties due. The payable credit is limited to the company’s PAYE/NIC liabilities of the staff engaged in qualifying activities in the accounting period.
SMEs will be able to claim RDEC if they do subcontracted or subsidised research. Companies in groups can surrender the RDEC against another group company’s CT liability.
Research and Development relief claims are more obtainable than many may believe, with potentially thousands of businesses missing out on vast R&D tax reliefs and tax credits. HMRC have very detailed guidance on R&D but the area is not black and white, and advancements may be simpler than many think. So what does it all boil down to?
Essentially, any R&D relief claim is hinged upon three key areas:
- Whether you are a SME or large company?
This determines what costs you may qualify for, how you apply the R&D relief and any potential tax credit.
A small or medium-sized enterprise (SME) for R&D is a company which has:
- Fewer than 500 employees; and
- Either: an annual turnover not exceeding €100 million; or an annual balance sheet total not exceeding €86 million
A company which is not within this definition is a large company.
- Whether the project qualifies as R&D?
This would be based on whether the project(s)/product(s) overcame a technical uncertainty in their field (i.e. this could include developing a tailored system, software or product for a customer) which a reasonable professional in the field could not easily overcome (such as by simply consulting another professional in the same field or through simple discussions).
In other words, either an advancement in the field which did not previously exist or a viable solution within a market, where no clear knowledge or understanding was available, to overcome an issue. Your project may research or develop a new process, product or service, or even improve on an existing one for a bespoke purpose specific to a customer, product or project.
HMRC details a qualifying project as one that:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
Show that you looked for an advance in the field
Your project must aim to create an advance in the overall field, not just for your business. This means an advance cannot just be an existing technology that has been used for the first time in your sector. The process, product or service can still be an advance if it’s been developed by another company but is not publicly known or available.
Show there was uncertainty
A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done – even after referring to all available evidence. This means that your company or experts in the field cannot already know about the advance or the way you achieved it.
Explain how you tried to overcome the uncertainty
You need to be able to show that the R&D needed research, testing and analysis to develop it. You need to be able to explain the work you did to overcome the uncertainty. This can be a simple description of the successes and failures you had during the project.
Show that a professional in the field could not work this out
You should explain why a professional could not easily work out your advance. You can do this by showing that other attempts to find a solution had failed. You can also show that the people working on your project are professionals in that field and get them to explain the uncertainties involved.
- What costs can be claimed for R&D?
Costs that qualify could include:
- Direct staff costs
Can claim full cost (or relevant percentage) of gross salaries, gross wages, Employers NIC and pension contributions for staff directly and actively engaged in the R&D project.
- Externally provided staff costs
Can claim 65% of the costs paid to an external agency for staff directly and actively engaged in the R&D project.
- Subcontracted costs
Can claim 65% of payments made to subcontractors or unconnected parties.
- Consumable items
Can claim full cost (or relevant percentage) of items that are directly employed and consumed in qualifying R&D projects. These include materials and the proportion of water, fuel and power consumed in the R&D process.
- Software costs
Can claim for the full cost (or relevant percentage) of software that is directly employed in the R&D project.
- Capital items
Can claim for the full cost of capital assets (i.e. computer, large plant or machinery, buildings etc.) that are directly attributable and employed in the R&D project. However, these assets will not qualify for the enhanced expenditure relief (detailed in the diagram below).
This list is not restrictive and merely covers the main and likeliest costs which qualify for an R&D project for a SME. Different rules may apply on these costs for large companies, as well as there being additional qualifying costs that they can claim.
When to begin/end R&D costs
R&D, and any relevant associated costs, begins when work to resolve the scientific or technological uncertainty starts; and ends when that uncertainty is resolved or work to resolve it ceases. This means that work to identify the requirements for the process, material, device, product or service, where no scientific or technological questions are at issue, is not R&D. R&D ends when knowledge is codified in a form usable by a competent professional working in the field.
Research and Development enhanced expenditure relief:
Any qualifying R&D projects and the costs associated with them can be used for additional deductions from trading profits as detailed below.
R&D costs would normally be deducted from a company’s taxable trading profits, therefore to calculate the enhanced expenditure relief the R&D costs are multiplied by 130% and this is also deducted from taxable trading profit – hence giving a total 230% deduction. So for example:
|Example A (with R&D claim)||£||Example B (without R&D claim)||£|
|Trading profits||350,000||Trading profits||350,000|
|Qualifying R&D costs (100%)*||(150,000)||Qualifying R&D costs (100%)||(150,000)|
|Amended trading profits||200,000||Taxable trading profits||200,000|
|R&D enhanced relief (150,000 x 130%)*||(195,000)||Tax liability at 19%||38,000|
|Taxable trading profits||5,000|
|Tax liability at 19%||950|
*230% R&D deduction
R&D tax credits (SME’s)
If a SME has a surrender-able loss in an accounting period in which it is entitled to an additional deduction from trading profits, it may convert all or part of that loss into an R&D tax credit.
A surrender-able loss is the lower of:
- Trading loss for the accounting period; or
- 230% of the qualifying R&D expenditure
The R&D tax credit is then 14.5% of the surrender-able loss. So for example:
|Trading profits (not including R&D costs)||100,000||Trading loss (not including R&D costs)||(5,000)|
|Total R&D expenditure (100%)||(50,000)||Total R&D expenditure (100%)||(1,000)|
Enhanced R&D expenditure relief (130%)
Enhanced R&D expenditure relief (130%)
|R&D tax credit
(£15,000 x 14.5%)
|2,175||R&D tax credit
(£2,300 x 14.5%)
Or alternatively, any loss generated can be carried forward against future trading profits.
R&D tax return claims
R&D relief should be included on a company tax return for the period the qualifying R&D was incurred.
If the company has been undertaking R&D and has not yet claimed the relief they must make a backdated claim within two years after the end of the accounting period the R&D was incurred.