As part of the government’s ongoing commitment to make the United Kingdom a centre for knowledge advancement, there are attractive tax relief schemes available for Research and Development.
Whilst tax relief on R&D has been in existence since 2000, in the past, the process of making the claim was cumbersome and time-consuming.
The government has given clear instructions to HMRC to simplify and accelerate this process with the overwhelming majority of companies qualifying for Small and Medium Sized Enterprises (SME) R&D Relief.
Our Top Tip is to apply to HMRC for the R&D Advanced Assurance which, broadly speaking, guarantees that for the first three accounting periods, HMRC will allow a claim for R&D Relief without further enquiries. The process takes a couple of months to complete with HMRC but does give certainty.
R&D Relief would have the impact of reducing the Corporation Tax liability for your business if you are making a profit.
For start-up and early stage businesses making a loss, this R&D Relief can be converted into a Tax Credit payment which could provide vital working capital. As the model below shows, for every £100,000 spent on qualifying R&D activity, there is a potential Tax Credit payment of £33,350.
|Total R&D Expenditure||£100,000.00|
|R&D Tax Relief: Enhanced Expenditure||£230,000.00|
|Tax Credit Rate||14.50%|
These rules apply for companies that qualify for the Small and medium sized enterprises (SME) R&D Relief. The qualification thresholds are:
- fewer than 500 staff;
- an annual turnover not exceeding €100 million; and
- a balance sheet not exceeding €86 million.
Larger organisations can claim a Research and Development Expenditure Credit (RDEC) which is currently 11% of qualifying expenditure.
A point to note is that the SME scheme is not available if you have received subsidy or grant that is recognised as ‘state aid’ by the European Commission. In this case, RDEC would apply.
In determining that your R&D project qualifies for either of these schemes, you would need to be satisfied you could demonstrate that it involved a scientific or technological advance.
The key in this evaluation is the advance rather than the product or the process. It is not sufficient for the product is commercially innovative if there is no advance that was not readily available or deducible by a competent professional working in the field.
On the other hand, these schemes are not just for new products. Developing an existing product or process to resolve technological uncertainty or to make a substantive improvement could also qualify for R&D relief.
Moreover, the R&D project does not have to have been a success to qualify so long as it can be established that the goal was to achieve a scientific or technological advance.
We recommend keeping a Technical Journal throughout the cycle of the project to record the activities undertaken and the challenges encountered. The higher the level of the challenges, the easier to validate that there was uncertainty. Remember, the HMRC teams are tax officers not technologists so steer clear of jargon.
If you are content your R&D project qualifies, then you can claim tax relief on revenue expenditure in the areas outlined below:
- Employee costs – the costs of staff under a contract of employment who are actively engaged in carrying out the R&D. The costs covered are salaries, wages, Class 1 NIC and pension fund contributions. If an employee is working on the R&D for part of their work time, then you can claim the appropriate proportion. Similarly, a proportion of the supervisory and managerial time spent directing these employees can be claimed.
- Staff providers – 65% of the payments to an agency providing staff engaged in the R&D provided the staff provider has a contract directly with the individuals whose services they supply.
- Subcontractors – under the SME scheme, 65% of payments made to subcontractors can be claimed so long as the payments are made to unconnected parties. The subcontracted work may be further subcontracted to any third party.
- Materials – the consumable or transformable materials used solely in the R&D.
- Payments to clinical trials volunteers.
- Utilities such as power, water and fuel used directly for the R&D. However, telecommunication and data costs do not qualify.
- Computer software used specifically in the R&D. Where a software is partly employed in direct R&D, an appropriate apportionment should be made.
Although capital expenditure is outside the scope of these R&D Relief schemes, there are other incentives available.
There are specific R&D capital allowances and mechanisms for claiming tax relief on R&D revenue expenditure that has been capitalised in your accounts.
For more general capital spend, the Annual Investment Allowance limit for plant and machinery expenditure is £200,000 per annum. This allowance enables qualifying capital costs to be fully expensed in the year of acquisition rather than being depreciated over time.
There is a cost in preparing and submitting an R&D Relief claim and a benefit of having expert advice but the fees should be proportionate.
The perceived scale of the challenge and the associated costs means that the HMRC have estimated that only a little over 10% of companies entitled to R&D Relief have made a claim. If you have not done so for prior years, all is not lost! You have up to two years after the end of the accounting period in which the R&D activity was undertaken to make a claim.
At CooperFaure, we have worked with many clients to ascertain whether their projects qualify for R&D Relief and, if so, to ensure that all the qualifying costs are being claimed. More importantly, we liaise directly with HMRC to secure the tax relief.
Our philosophy is to provide an affordable, personal service that starts with a conversation about your business and an honest appraisal as to whether you would qualify for R&D Relief.
If you would like to arrange an initial consultation that is free and without obligation to discuss your circumstances, please email us at firstname.lastname@example.org.