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Date of publication: December 2017

What is Research and Development Tax Relief?

R&D tax relief is a relief claimable by trading companies of all sizes. Companies making qualifying expenditure on R&D can claim an Above The Line Tax Credit (for large companies) or an extra deduction against taxable profits of 130% (for SME companies) for this expenditure.

For example, a small company spending £1 million on R&D could get an extra tax deduction of £1,300,000; potentially saving them tax of up to £260,000. If the small company was loss making then it could surrender these losses for a cash payment of up to £333,500 from HMRC.

SME companies can obtain a cash flow advantage by trading in the extra deduction and receiving a cash payment from HMRC. The company is required to be a going concern, loss making, and have no way to immediately relieve its loss in the period of the claim. For expenditure incurred between 1 April 2012 and 31 March 2014 the rate of payment for the R&D tax credit was 11% of the surrendered losses. For expenditure incurred on or after 1 April 2014 the rate of payment has been increased to 14.5%.

The ‘above the line’ scheme (ATL Credit Scheme), for large companies, was introduced for expenditure incurred on or after 1 April 2013. The scheme allows companies to receive an ATL credit of 11% of the qualifying expenditure. This credit provides tax relief at an effective rate of 8.8% of the qualifying expenditure. The credit, net of tax, is payable to companies with no corporation tax liability. It is possible for some SMEs to opt into the ATL scheme in cases where basic SME relief is not available, e.g. grant funding that is a notified state aid will reduce the claim to the large company rate only.

For example, a large company spending £1 million on R&D could potentially save tax of up to £88,000. Any credit remaining after settling liabilities to HMRC could be repaid to the company.

In the Autumn 2017 Budget, it was announced that the ATL credit rate is to increase from 11% to 12% with effect from 1st January 2018.

What is qualifying expenditure?

  • Staffing 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 are qualifying indirect activities?

  • Scientific information services which are conducted for the purpose of R&D support
  • Indirect supporting activities such as security, administration, finance and personnel, which are undertaken for R&D
  • Training required to support an R&D project
  • Research into new testing or sampling methods
  • Feasibility studies to develop strategic direction of a specific R&D activity

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 will 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?


Disclaimer: This note does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.

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