Research and Development Tax Relief and Tax Credits

The Research & Development Tax Relief and Tax Credit Scheme represents a key part of the Governments’ strategy to boost the UK economy through innovation in business.

Could your company benefit?

Those companies/organisations who are liable for Corporation Tax, and who also meet the qualifying criteria, can claim under:

  • The SME Scheme, or
  • The Large Company Scheme

(Note: For companies not paying corporation tax, there is the opportunity to claim cash back from HMRC).

HMRC define SME’s, for R&D Relief purposes, as a company or organisation with fewer than 500 employees and either:

  • annual turnover not exceeding £100 million, or
  • a balance sheet not exceeding £86 million

Which costs qualify for Relief?

Tax Relief can be claimed on revenue expenditure – generally the costs incurred in the day-to-day running of the business, as opposed to capital expenditure on assets.

However, companies who are involved in R&D and spend money on capital assets may be entitled to claim relief for such capital expenditure as a capital allowance known as ‘Research & Development Allowance’.

How much can be claimed under the SME Scheme?

Those SME’s that are carrying out qualifying R&D can currently claim a corporation tax deduction of 225% of their qualifying spend. This means that a £100,000 spend would result in a £225,000 reduction in taxable profits, potentially saving £45,000 in corporation tax (at 20%).

However, if the company is loss-making this benefit may not be received until future years when profits are made. In order to improve the cash flow of these loss-making SME’s, the tax rules allow the company to surrender the loss attributable to the enhanced R&D spend for a tax refund, by way of a cash sum paid by HMRC.

As of 1 April 2014, this has been increased from 11% to 14.5%, therefore the £225,000 (based on a £100,000 spend) would result in a refund of £32,625.

How much can be claimed under the Large Company Scheme?

For large companies, and SME’s having to claim under the Large Company Scheme, the tax relief on allowable R&D costs is 130%, meaning that for each £100 of qualifying costs, the company could have the income on which corporation tax is paid reduced by an additional £30, on top of the £100 spent.

(If there is an allowable trading loss for the period, this can be increased by 30% of the qualifying R&D costs ie £30 for each £100 spent. This loss can then be carried forwards or back in the usual way).

Alternatively, with regards to R&D expenditure incurred on or after 1 April 2013, a company can elect to receive the new R&D Expenditure Credits (RDECs), instead of the traditional enhanced-deduction relief. This is often referred to as the ‘above the line’ tax credit as it will be accounted for as a reduction in profit before taxation.

Under the RDEC, for those companies liable to corporation tax, a credit of 10% of the qualifying expenditure is deducted from the corporation tax liability. Those companies that do not have such a liability may be paid the credit in cash, subject to a cap based on the PAYE and NIC costs of the staff included in the claim. This could be of huge benefit to many loss-making companies who are unable to take practical advantage of the large company enhanced deduction scheme.

At present, the ‘above the line’ credit is optional, but will replace the enhanced-deduction scheme in April 2016.

Which R&D projects may qualify?

Companies whose R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty, and not simply an advance in its own state of knowledge or capability can claim for R&D Relief.

This is a complex definition therefore please feel free to contact us for assistance in determining whether your activities meet the criteria.

How Stanes Rand can help

Despite being available since 2000, many companies are yet to claim this valuable relief, either because they are unaware they can claim or are simply not sure how to claim.

Stanes Rand can assist at every step – from determining whether your company qualifies, to preparing and submitting claims and carrying out claim reviews to ensure your company continues to optimise all benefits available.

Heading this area at Stanes Rand is James Doggett. James has completed in excess of one hundred successful clients’ R&D claims personally, and has assisted practitioners with a great many more. James believes it is his ability to get to grips and understand the technical and scientific aspects of a clients’ work which has helped generate successful claims where other have failed.