Many companies may be unaware that they are eligible to claim research and development (R&D) tax relief, and will be surprised by how much relief they could claim.
Companies carrying out R&D related activities and incurring general day-to-day running costs may be able to reduce their corporation tax liability, by claiming relief under the R&D tax relief scheme.
The scope of qualifying R&D expenditure is surprisingly broad, and the relief offered has become increasingly generous.
Who can claim the relief?
A company may still be eligible to claim R&D tax relief even if it has:
- not started to trade for tax purposes
- sub-contracted the R&D to a third party
- abandoned the activity which is the subject of the R&D costs
There is no exhaustive list of R&D activities. It is necessary to consult the guidelines and seek professional advice to determine whether a particular expense qualifies as R&D expenditure.
Broadly, however, R&D expenditure is defined for tax purposes as occurring when a project is undertaken to achieve an advance in science or technology.
The activities which directly contribute to achieving this advance through the resolution of scientific or technological uncertainty will be classed as R&D expenditure, along with certain qualifying indirect activities related to the project.
As a result, you may be able to claim for R&D tax relief if you carry out any of the following activities:
- design work
- development of software
- development of any process that improves internal efficiencies
- using existing technologies in a unique way or combining them in an original manner
What relief is available?
The scheme is a tax incentive which enhances a company's expenditure against their taxable revenue, reducing their corporation tax liability. The tax incentive can be either:
- offset against corporation tax
- refunded against corporation tax already paid
- carried forward or backward as additional losses
- surrendered for group relief
- used to receive a payable tax credit
Different regimes apply depending on whether the business is a small or medium sized enterprise (SME) or not.
An SME (broadly one with a staff headcount less that 500, annual turnover not exceeding #100m, and a balance sheet total not exceeding #86m), can claim tax relief at 225%, i.e. for each £100 of qualifying costs, the company could have its corporation tax profits reduced by an additional £125 on top of the £100 spent.
Alternatively, an SME can increase any allowable trading loss by 125% of the qualifying R&D costs, i.e. £125 for each £100 spent, or, if it is in a loss-making position, attain a payable tax credit calculated at 11% (from 1 April 2012) of the surrenderable loss for that period.
A company that is not an SME can only claim under the Large Company Scheme. A Large Company can deduct up to 130% of its eligible R&D expenditure from taxable profits, or opt for a payable tax credit when in a tax loss-making position, instead of having to accumulate losses. The R&D tax credit is paid at the rate of 10% of qualifying expenditure.
If you are not already claiming R&D tax relief, perhaps you should be. If you are trying to improve certain processes in your business, there is likely to be some uncertainty about the success of the process, and R&D tax relief claims can be applicable. The relief available itself has also become increasingly beneficial, especially for companies not paying corporation tax, and could provide crucial cash flow benefits for your company.