Research and development (“R&D”) tax relief provides innovative businesses with a valuable tax incentive to help fund their R&D activities – and it’s not just available to those wearing white coats.
R&D costs are incurred far more frequently than most businesses imagine and potential claims are often overlooked.
WHAT IS R&D?
The question of what is R&D is broadly based around innovation and the definition is provided by both FRS102 & FRS105 and by DTI Guidelines.
There needs to be a project that seeks to achieve an advancement in science or technology. This means an advance in an overall knowledge or capability in a field of science, not just an advancement in the company’s own knowledge. However, if a particular advancement has already been made but the details are not in the public domain, R&D may still take place.
The activities undertaken by the company to directly contribute in achieving this advancement, which includes making an appreciable improvement to an existing process, system, material, device or service, through the resolution of scientific or technological uncertainty will be R&D.
Certain qualifying indirect activities related to the project may also be R&D.
The routine analysis, copying, or adaptation of an existing product, process, service or material will not be R&D.
WHO MAY CLAIM THE RELIEF?
The relief can be for capital or revenue costs but is only available to companies. The rates for small or medium sized companies (“SMEs”) are currently 230% if on revenue account, or 100% if on capital account. Therefore, for every £100 spent, the net cost to the business after R&D relief is only £56, compared with £81 without the relief. In other words, the net saving is 43.7% of the qualifying R&D spend.
From 1 April 2016, the “Above the Line” (“ATL”) scheme became mandatory for large companies, and is referred to as R&D Expenditure Credits.
“R&D EXPENDITURE CREDITS” (“RDEC”) – FORMERLY KNOWN AS ATL CREDIT
The aim of the RDEC scheme is to increase the visibility of large company R&D relief and provide greater cashflow support to companies with no corporation tax liability.
Instead of giving an enhanced deduction, the RDEC scheme entitles a company to a payable credit. The taxable credit is 13% of qualifying expenditure incurred on or after 1 April 2020 (previously 12% from 1 January 2018 to 31 March 2020 and 11% from April 2015 to 31 December 2017). The credit is first treated like a grant and is added to the taxable income of the company. The corporation tax liability is then calculated but a deduction is given for the RDEC, reducing the net amount payable to HM Revenue & Customs (“HMRC”). Since the credit is taxable, the net saving is 10.53% (9.72% and 8.91% previously) of the qualifying R&D spend.
Any credit balance can be repaid to the company but is restricted to the PAYE and NI liabilities of the staff engaged in the R&D activity.
If the R&D relief of 230% results in a loss for the SME, it may surrender that loss and claim a tax credit from HMRC of up to 14.5% of the loss. The surrenderable amount of the loss is the lower of the unrelieved trading loss and 230% of the qualifying R&D expenditure.
Previously, the tax credit was restricted to a maximum amount equal to the company’s PAYE and NI bill, but this restriction was removed for periods ending on or after 1 April 2012. However, following the announcements in the 2018 Autumn Budget and the Spring 2020 Budget, from April 2021 it is proposed the tax credit will again be capped, this time at three times a company’s total PAYE and NI bill. The government will consult on how the cap will be applied, to minimise any impact on genuine UK businesses.
Conditions for the revenue relief:
• A company needs to incur the expenditure;
• The expenditure is on R&D that is relevant to the company’s trade and is not capital in nature;
• The expenditure is allowable as a deduction in computing the profit for the period;
• The expenditure is qualifying expenditure; and
• The company was not sub-contracted to carry out the R&D by another person (although if incurred after 9 April 2003, a lower enhanced rate of relief might be available).
• 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.
• 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.
If the expenditure is capital in nature, no enhanced revenue relief will be available, although relief at 100% should be due. Allowances previously given may be clawed back if the asset is sold.
A previous adviser had told our 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.
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.