Research & Development

Research and Development (R&D) tax relief

R&D Tax Relief is a corporation tax relief that can reduce your company’s tax bill or even lead to a cash payment from HMRC.  It is available to all companies and can be claimed on advances across a broad range of sciences  and technologies.

There are two available schemes with different rates of relief:

SME Scheme

The current tax relief on qualifying R&D costs is 230 per cent – in simple terms every £1 of qualifying costs your company spends will be treated as £2.30 for tax purposes.

The SME scheme is available for companies that have:

- 500 employees or less and:

  •  turnover not in excess of €100m, or
  • balance sheet assets not in excess of €86m

However, when looking at these limits there are circumstances where the results of other related parties need to be taken into account, e.g. where there are significant corporate investors (e.g. if the company is controlled by a large multinational group, SME relief would not be available). Therefore a detailed appraisal would need to be made of the ownership structure of the company as part of any claim.

Even if a company qualifies as an SME under the size criteria, it can be prevented from making a claim under the SME scheme on research either subcontracted to it by another party or where grants or subsidies have been received towards the R&D. In certain circumstances a claim under the large companies scheme can be made in its place.

SME scheme example: Profitable company – with and without an R&D claim

    Without R&D (£)     With R&D (£)  
Sales         400,000      400,000
Costs       (100,000)    (100,000)
Costs that would qualify for R&D       (100,000)    (100,000)
R&D enhancement      Not Claimed    (130,000)
Taxable profits         200,000        70,000
Tax @ 20%           40,000        14,000
Savings          26,000

If a company is loss making there is the ability to surrender any loss resulting from the R&D claim (including costs and enhancement) in return for a repayable tax credit at a rate of 11% (limited to the company’s overall trading loss). From 1st April 2014 the repayable tax credit rate was increased from 11% to 14.5%.  

SME scheme example: Loss making company – with and without an R&D claim

   Without R&D  (£)   With R&D  (£/11%)  With R&D  (£/14.5%)
Sales      150,000       150,000        150,000
Costs    (100,000)     (100,000)      (100,000)
Costs that would qualify for R&D    (100,000)     (100,000)      (100,000)
R&D enhancement   Not Claimed     (125,000)      (125,000)
Loss      (50,000)     (175,000)      (175,000)
R&D tax credit repayment at 11%/14.5%   Not Claimed         19,250          25,375

Although this is less than might be achieved by carrying the losses forward (at 20%, relief of £35,000 would be received), for many companies the cash flow advantage of this proves very attractive.   

Large company scheme

A ‘large company’ is defined as a company that does not meet the SME criteria outlined above.

Enhanced Deduction

The uplift for a large company is 30% of ‘qualifying expenditure’. However, unlike the SME scheme there is no ability to surrender a loss for a repayable tax credit, and it can only reduce taxable profits or increase carried forward losses. This method of relief is only available until 31st March 2016. Based on a 20% tax rate the net benefit of an R&D claim under the enhanced deduction scheme is 6%.

Above the Line (“ATL”)

From 1st April 2013 companies unable to claim under the SME scheme can instead claim a credit equivalent to 8.8% (net) of the R&D incurred.

The R&D credit is shown in the company’s profit and loss account as an income being calculated at 11% of the qualifying R&D spend. This credit is however subject to corporation tax. This not only improves the company’s profit & loss account but enables companies to allocate the R&D benefit to specific departmental budgets rather than it being a tax only item.

This credit is able to be offset against UK corporation tax and surrendered to other UK group companies (subject to restrictions). If the credit cannot be used then subject to a number of conditions the R&D credit may be eligible to be paid out in cash.

This method of obtaining relief is optional from 1st April 2013 but will become compulsory from 1st April 2016.

    Without R&D (£)     Enhanced Deduction     With R&D (£/ATL)  
Sales            400,000                 400,000              400,000
Costs          (100,000)               (100,000)            (100,000)
Costs that would qualify for R&D          (100,000)               (100,000)            (100,000)
ATL credit                    11,000
R&D enhancement       Not Claimed                (30,000)  
Profit            200,000                 170,000              211,000
Tax              40,000                   34,000                42,000
Tax (after ATL credit)                    31,000

Qualifying expenditure

The main categories of qualifying expenditure are:

• Staffing costs (a proportion of those individuals’ salary for time spent on R&D can be claimed).

• Payments to subcontractors or externally provided workers

• Costs of consumable items used up in the process of R&D (eg materials, heat, light and power, and prototypes, providing not sold) 

Definition of R&D

The definition of ‘R&D’ is based on a set of prescribed guidelines. Broadly speaking in order for a project to qualify it must seek to make an ‘advance in science or technology’ resulting in a new or appreciably improved product, process or device. It must do this through the resolution of ‘technological uncertainty’ e.g. at the outset of the project there must have been some doubt as to whether the advance would be achievable. 

Taylorcocks – R&D specialists

At taylorcocks, we have extensive experience of preparing claims across a number of industry sectors including pharmaceuticals, engineering, telecommunications, food science and software and agreeing  these claims with HM Revenue & Customs’ specialist R&D units. 

We work closely with the company’s technical and accounting departments to produce a report that details both the nature of the company’s R&D activities and maximises the costs that can be included in the claim.

In the past twelve months we have worked on claims totalling in excess of £700,000.

Recent successes include:

Savings across two years of £367,000 for an online marketing company who had developed new software to enable them to tailor their clients advertising claims more specifically, by profiling their customers’ internet usage.  This included a meeting with HMRC from which no changes to the claim were required.

An R&D tax credit of £45,000 for a footwear company using  innovative sole technology.

Our fee structure can be flexible, and we can quote on both a fixed fee basis, or contingent upon success of the claim.

Patent Box

Innovative businesses that own patents, or exclusively license-in their patents, can now take advantage of a reduced corporation tax rate. The preferential rate is in addition to any qualifying R&D tax credits and is applicable to profits generated by UK-owned intellectual property from 1st April 2013. The Treasury is keen to ensure that smaller British businesses take advantage of the new scheme.

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