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Date of publication: March 2012

What is Research and Development Tax Relief?

Companies making qualifying expenditure on research and development can claim an extra deduction against taxable profits of 30% (for large companies) or 125% (for SME companies) for this expenditure (100% for SMEs for expenditure incurred before 1 April 2012).

For example, an SME company spending £1 million on R&D could get an extra tax deduction of £1,250,000; potentially saving them tax of up to £300,000.

A large company spending £1 million on R&D could get an extra tax deduction of £300,000; potentially saving them tax of up to £72,000.

SME companies can obtain a cash flow advantage by trading in the extra deduction and receiving a cash payment. The company is required to be a going concern and loss making in the period of the claim. The payment is restricted to the amount of payroll taxes paid by the company if the claim is for a period previous to 1st April 2012. From the 1st April 2012 a claim for repayment for tax may be made regardless of the amount of payroll taxes suffered by the company and employees, but will only be paid to the extent of 11% of the relief claimed.

What is Qualifying Expenditure?

• Staff costs related to research and development projects.
• Materials, water, fuel and power used directly in carrying out research and development.
• Software purchased and used in the development.
• 65% of sub-contracted research and development costs may be eligible for relief for SME companies. The sub- contractor does not need to be based in the UK.
• Capital Expenditure is not included, but 100% tax relief may be available for R&D capital costs.

What is the definition of Research and Development?

An R&D project is one that seeks to achieve scientific or technological advances. It will aim to advance the overall knowledge or capability in a field of science or technology. It will involve significant scientific or technological uncertainty.

It need not necessarily fall into the "hi-tech" or laboratory-based industries - software development, cosmetics, the food industry - all of these involve research and development, and the list goes on.

Essentially the questions are- What was the problem that needed to be solved? Was there not a commercial solution already available in the public domain? How did you solve the problem?

One must be careful to distinguish between the point at which research and development stops, and production begins.

What are the other main conditions?

An SME (i.e. a smaller company) is one with less than 500 employees and either annual turnover of less than €100m or a balance sheet value of less than € 86m. Other companies in the same group may need to be taken into account when looking at these limits.

The project must be a commercial one the results of which will be exploited by the company as part of its ordinary trading activities.

Prior to December 2009, the company had to own, and be taking steps to protect, the associated intellectual property, for example, by patenting the new technologies. This requirement has been lifted.

Those commissioning R&D on a subcontract basis can still claim but only under the lower rate scheme for larger companies and under the correct circumstances.

There is a no minimum spending requirement (Although for periods previous to 1st April 2012 it was £10,000).

OC Comment

There are other specific conditions and requirements on which professional advice should be sought. It goes without saying that this is an increasingly valuable relief and all avenues for making a claim should be pursued.