The R&D tax relief regime was introduced more than 15 years ago but its attractiveness has been considerably enhanced with recent increases in the benefits available.
Two schemes exist, of which the most attractive is the scheme targeted at small and medium sized enterprises (“SMEs”). For these purposes, an SME is generously defined and a company with, broadly, up to 500 employees and either turnover of less than €100m (£79m) or gross assets on its balance sheet of less than €86m (£67m) will be treated as an SME.
Under the SME scheme, the tax deduction for qualifying expenditure is enhanced by 130%. Assuming a corporation tax rate of 19%, this means that the enhancement is worth £25 for every £100 spent. When the standard tax deduction is taken into account, this means that the government contributes £46 towards every £100 of qualifying costs.
For companies which aren’t paying corporation tax, the R&D tax relief can be surrendered to HMRC in return for a cash payment equal to 33.35% of the eligible costs incurred. This provides an exceptionally attractive source of funding for start-up companies and companies investing in new technology in order to become profitable.
The large company scheme is less generous but was significantly revised in 2013. An ‘above the line’ credit of 11% (12% from 1 January 2018) can be claimed rather than the historic enhanced deduction of 30%. This credit is taxable, meaning that taxpaying companies receive a cash benefit of 9.7% of the qualifying expenditure. Profitable companies will offset the credit against their corporation tax liabilities. However, loss making companies can also claim the credit as a cash receipt.
Who can claim?
In order to claim R&D tax relief, a company must undertake a project which seeks to achieve an advance in the overall knowledge of a field of science or technology through the resolution of scientific or technological uncertainty. The R&D project should be related to the company’s trade and be aimed at developing or appreciably improving an existing product, service, material or process.
Approximately 9,000 companies claim a total of £1bn R&D tax relief each year, but there are two main reasons why so many eligible companies don’t make claims:
- They are unaware of the relief and their advisers do not alert them to it- indeed, HMRC report that many new claims are made only when a company has appointed new advisers; or
- They wrongly assume that R&D requires scientists in white coats working in a laboratory and that they are not undertaking R&D.
By reading this, you have overcome the first reason for not claiming. As far as the second reason is concerned, it is worth noting that you do not need to have employees dedicated to R&D or to have an R&D department disclosed as such. You do not even need to account for the costs as R&D costs. You simply need to be seeking to increase technological or scientific capability by overcoming technological or scientific uncertainty. Equally, you do not need to operate in a high tech or pharmaceutical sector; the largest claimants of R&D tax relief are the banks and we have experience of successful claims by retailers, data handling companies and manufacturers among others.
What costs can be claimed for?
To qualify the expenditure must be revenue expenditure.
Eligible expenditure relates to:
- Staff costs (including employers pension sand employers NI, but not benefits in kind)
- Externally provided workers, e.g. agency staff (65% allowable but different rules apply to connected parties)
- Consumables used directly in the R&D process
- Power, water, fuel used directly in the R&D process
- Computer software used directly in the R&D process but not things like telecommunication costs and data costs
- Subcontracted R&D costs can be claimed (65% allowable but different rules apply where there are connected parties)
Capital expenditure is not eligible, although such expenditure can be written off for tax purposes in the year in which it is incurred, (via the Research & Development Allowances regime) rather than being depreciated over many years under the usual capital allowances regime.
What R&D projects qualify?
A project will qualify as R&D if it aims to advance the overall knowledge or capability in a field of science or technology where there is scientific or technological uncertainty. Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. Uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties will not qualify for the relief.
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that how precisely it was done is not in the public domain. In either case a valid technological uncertainty can still exist. Alternatively, if the project is one where there is little public information available, the company will need to show that the person leading the R&D project are themselves competent professionals working in the relevant field.