One way to minimise a company’s corporation tax liability is to consider whether it has undertaken any research & development projects during the year.
Research & development tax relief provides innovative businesses with a valuable tax incentive to help fund their research & development activities and other business requirements – and it’s not just available to those wearing white coats!
Research & development costs are incurred far more frequently than most businesses imagine and potential claims are often overlooked. Research & development tax relief may be available for your business if you carry on projects that seek to achieve advancement in science or technology and previously at Albert Goodman we have dealt with claims for a wide variety of businesses including building contractors, bakers and software developers.
Where a claim is made the relief enables a profitable company to reduce its profits or even receive a cash repayment of tax already paid, with loss-making companies able to decide whether to bank further losses for future offset or to surrender losses for an immediate cash repayment from HM Revenue & Customs.
WHAT IS R&D?
As mentioned above, there needs to be a project seeking to achieve an advancement in science or technology. This means there needs to be an advancement in the overall knowledge in a field and not just in the company’s own knowledge. However, if a particular advancement has already been made but the details are not in the public domain, research & development may still take place. The activities undertaken in achieving this advancement will be research & development, including any improvements to an existing process, system, material, device or service, through the resolution of scientific or technological uncertainty, but the routine analysis, copying, or adaptation of an existing product, process, service or material will however not be research & development.
WHO MAY CLAIM THE RESEARCH & DEVELOPMENT TAX RELIEF?
The relief is only available to companies and the rate of relief depends on the size of the business. For example, small and medium-sized companies (“SMEs”) currently benefit from a super deduction against profits calculated as an additional 130% of the qualifying research & development costs incurred. Therefore, for every £100 spent, the net cost to the business after research & development relief is only £56, compared with £81 without the relief. For large companies, instead of giving an enhanced deduction against profits, the research & development relief is given by way of a payable credit, that is added to the taxable income of the company, before being given as a deduction against the corporation tax liability. The net saving is 9.72% of the qualifying R&D spend and is less generous than the relief available for smaller companies.
QUALIFYING COSTS ELIGIBLE FOR R&D RELIEF STAFFING COSTS
Staff directly or actively engaged in R&D activities. Will include cash emoluments, employer’s national insurance, and company pension contributions. Does not include any non-cash benefits in kind, recruitment costs or agency worker fees. May include payments to externally provided workers (at 65%) but can only be in respect of salary costs and no other support activities.
CONSUMABLE ITEMS
Any convertible or transformable items such as power, light, heat, water and consumable materials. Excludes any capital equipment (although this might qualify for 100% capital relief), or materials used in ‘first of class’ products.
COMPUTER SOFTWARE
Computer software directly employed in R&D, for example collecting and analysing data on an R&D project.
SUBCONTRACTED COSTS
May qualify under certain circumstances, although the relief due may be restricted to only 65% of the payment made to the subcontractor. Broadly, only available to SMEs subcontracting out, or to large companies subcontracting to certain qualifying bodies.
CAPITAL RELIEF
If the expenditure is capital in nature, no enhanced super deduction will be available, although relief at 100% should be due by way of enhanced capital allowances, which are then offset against taxable profits. Allowances previously given may be clawed back if the asset is sold though.
CASE STUDY
A previous adviser had told a client that one particular project would not qualify for R&D relief. Not only were AG Tax Consulting able to confirm the project would qualify for the enhanced tax allowances, but we also identified a further two qualifying projects, netting the client an immediate tax refund of approximately £32,000, with reduced future corporation tax bills for the duration of the projects.
WHAT NOW?
If you think your company may have carried out R&D and are unsure if the project will qualify for the relief or not, contact AG Tax Consulting to ensure you are maximising the reliefs available to your business, within the reporting time limits as R&D claims must be made within two years of the end of the accounting period in which the R&D projects were undertaken.