Claiming Research & Development Tax ReliefJacqueline McGregor
The Research and Development (R&D) tax credits scheme offers businesses the ability to invest in new technologies and scientific development in exchange for generous tax reliefs. Businesses investing in R&D projects can benefit from a significant reduction in their Corporation Tax bill.
For tax purposes, the requirements that must be met for R&D to qualify for relief include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes in a new way. R&D activities can qualify for tax relief even if the project in question failed and both profitable and loss-making companies can benefit from making a claim.
R&D tax relief is available on qualifying expenditure and reduces the amount of Corporation Tax payable by profitable companies, allows for a cash credit for loss-making companies, or a combination of the two. The amount of R&D tax relief available depends on the total qualifying spend on R&D activities.
There are two schemes for claiming relief – the Small or Medium-sized Enterprise (SME) Scheme and the R&D Expenditure Credit (RDEC) Scheme for large companies. The SME scheme offers more generous reliefs. However, SMEs can elect to claim relief under the RDEC scheme if they are unable to claim relief under the SME scheme because of a grant or subsidy, or because they are carrying out subcontracted R&D work.
A company is defined as an SME if staff headcount is less than 500, and turnover is less than €100m or the balance sheet total is less than €86m. There are also a number of further considerations that must be taken into account when determining if a company is defined as an SME such as group structures and whether grants are being received.
SMEs can claim R&D tax credits of 230% on qualifying expenditure. This effectively means that for every £100 a company spends on qualifying R&D, they can deduct £230 from their profits when calculating profits chargeable to Corporation Tax.
The RDEC allows companies to claim an enhanced Corporation Tax deduction or payable credit on qualifying R&D costs. The RDEC replaced the large company scheme that was withdrawn in April 2016. This credit helps large companies to claim more support for their R&D activities.
The way the relief is calculated is very different to that for SMEs. Large companies claim RDEC. The RDEC rate increased from 12% to 13% for expenditure incurred after 1 April 2020. The RDEC allows companies to claim an enhanced Corporation Tax deduction or payable credit on qualifying R&D costs.
For loss making companies using either the SME or RDEC schemes the tax credit is fully payable (subject to certain restrictions).
Individuals, partnerships or Limited Liability Partnerships are not eligible to use the scheme. However, we would recommend that careful analysis is undertaken before a partnership invests in significant R&D expenditure as it may be more beneficial to look at incorporating.
Companies making their first R&D claim can qualify for Advance Assurance from HMRC. If Advance Assurance is granted, any R&D claims in the first 3 accounting periods will be accepted once they are in line with what was agreed. Obtaining Advance Assurance can give companies confidence to invest in R&D knowing they will benefit from the stated tax relief.
The rules as to what qualifies in this regard are complex. In general, however, a project qualifies as R&D if:
- It seeks to achieve an advance in science or technology.
- The research is relevant to the business.
- The business is of a trading nature as distinct from someone working in a profession or vocation.
Any qualifying costs for claiming R&D tax relief must be of a revenue nature. However, capital costs relating to R&D work may qualify for R&D capital allowances using a separate procedure. The company must also have already spent the money on qualifying projects. A claim cannot be made proactively.
HMRC will generally accept any reasonable method for calculating amounts that need to be apportioned between relating to R&D and non-R&D expenditure.
There are specific guidelines as to what qualifies as R&D expenditure. These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity. The R&D must be related to the companies’ trade or intended trade.
The qualifying costs must be of a revenue nature. However, capital costs relating to R&D work should qualify for R&D capital allowances using a separate procedure.
Qualifying revenue costs include:
- Staff costs relating to staff actively engaged in carrying out R&D.
- Materials consumed or transformed in the R&D process.
- Utilities – power, water, fuel used directly in carrying out R&D.
- Software – computer software used directly in the R&D.
- Subcontracted R&D expenditure.
In order to make a claim, businesses need to perform a detailed review of all their activities and isolate all expenditure relating to R&D projects.
Companies must make any claim for R&D Relief in their company tax return or amended return. The normal time limit for making a claim is two years after the end of the relevant Corporation Tax accounting period, and HMRC aims to settle claims within 28 days.
We can assist you in relation to any queries you have in relation to R&D. Please do not hesitate to get in touch.