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R&D tax credits

A tax break for companies engaging in research and development

Political affiliation notwithstanding, it can largely be agreed that both current and previous Governments recognise the importance of innovation to increase the UK’s productivity and competitiveness with the world, the essential foundations of a strong and successful national economy.

In 2000, the government introduced a scheme to encourage scientific and technological innovation within the UK under the guise of “Research and development tax relief”. This regime enables both small and medium enterprises (SMEs) and larger corporates to potentially reduce their tax bills or to receive a cash payment.

This leads neatly to the three most important questions:

  • What are qualifying R&D costs and is my business eligible?
  • What is the quantum of benefits I can potentially receive?
  • How do I claim?

Qualifying costs and eligibility

R&D has a specific statutory definition and dictates that companies must be undertaking projects which “advance overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties” in order to qualify.

This can include creating new processes, products or services or making improvements to existing ones. Examples of qualifying activities include software development, engineering design and new construction techniques as well as the more traditional “white coat” research into health and life sciences.

For qualifying companies, costs relating to direct and externally provided staff, subcontracted R&D, consumables, software, trials, prototyping and independent research may all qualify for relief. It should be noted however that capital expenditure does not qualify under this scheme, nor does expenditure on the production and distribution of goods and services.

As a result, the business can claim for salaries, social security deductions and even pension fund contributions for staff directly and actively engaged in the R&D project, this encompassing both “hands on” employees as well as the proportion of managerial time required to supervise these individuals. Generally speaking, the company can also claim for 65% of costs for externally provided staff and subcontractors.

Potential benefits

From 1 April 2015, companies can obtain relief for 230% of their qualifying R&D costs. This equates to existing expenditure being grossed up by an additional 130% when calculating the company’s taxable profit for a period.

In a large number of cases, this will generate a taxable loss which can be relieved in line with the normal rules i.e.

  • Offset against other profits or gains in the same period;
  • Carried back to offset against profits of the previous year; or
  • Carried forward for offset against future trading profits.

Whilst carrying back the losses will generate a repayment from HM Revenue & Customs, the alternative is to surrender part of that loss to the government in return for a tax refund.

The proportion of the loss which can be surrendered is the lower of the following:

  • The unrelieved trading loss; and 230% of the qualifying R&D expenditure.

Example

Widgets Limited had the following results for the tax year ended 31 March 2017:

 

Trading loss: £170,000 (after relief for R&D expenditure) Qualifying R&D: £45,000

 

The surrenderable loss is the lower of: £170,000

£45,000 x 230% = £103,500

 

The tax credit given is thus £103,500 x 14.5% = £15,007 which equates to 33.35% of qualifying costs.

 

The trading loss of the company carried forward is now £66,500 i.e. £170,000 – £103,500

Claiming relief

A claim for R&D tax relief must be made on the company’s corporation tax return.

As always it is recommended you discuss any questions on this with your professional adviser who will be able to assist in the mechanics of making any such claim.


Lisa Garfinkle – [email protected]

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