Date of publication: November 2018
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 and will involve significant scientific or technological uncertainty.
It is not necessary for a company to be involved in a high tech field in order to qualify for R&D relief. All that is needed, is a problem without a readily deducible or freely available solution which the company is attempting to solve by developing an advance.
There are some restrictions on what counts as an advance, with social science in particular being excluded. A Company does not need to succeed in its R&D projects in order to qualify for R&D relief. Indeed the idea behind R&D relief is that the outcome of R&D projects is uncertain and projects may experience frequent failures before success is achieved.
R&D tax relief is a relief claimable by trading companies of all sizes. Companies making qualifying expenditure on R&D can claim under two schemes, the Research and Development Expenditure Credit (RDEC) or the SME Relief Scheme
To qualify for the SME Scheme a company must fulfil the following conditions:
When determining the first two conditions you must include staff, turnover and balance sheets of any linked companies (>50% parent and subsidiaries) and a proportion of staff, turnover and balance sheets of any partner companies (>25% share holdings).
SME’s may deduct an additional 130% of qualifying expenditure and if loss making may make a tax credit claim of 14.5% of the surrenderable loss.
From 01 April 2020 the tax credit will be capped at three times the Company’s total Pay As You Earn (PAYE) and NICs Liability for the year. This change is subject to consultation and may see further amendment.
The RDEC scheme is available to all companies engaged in R&D including those SME’s disqualified for receiving state aid or performing subcontracted work.
The scheme provides a taxable 11% (12% on expenditure from 01 January 2018) credit on qualifying expenditure and may result in a cash credit depending on the company’s individual circumstance. There is a prescribed method for applying the tax credit and it is important this is done correctly as it can impact future tax years.
In order to qualify as R&D expenditure an expense must fit exactly into one of a number of categories HMRC has set. The most common ones are:
If an expense does not fit into a category it cannot be claimed no matter how vital it may be to the R&D being performed.
A number of categories permit the inclusion of expenses that are only indirectly supporting the R&D process. Typical examples of indirect costs are:
Companies can make or amend an R&D claim within two years of the end of the relevant accounting period. An overview of the R&D claim should be included with the company corporation tax return and HMRC aim to respond within 28 days of submission.
Many companies can benefit from significant cash tax savings either by way of reduced tax liabilities, refunds, or cash tax credits.
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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