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All companies should review annually whether they can claim this valuable tax relief. It can result in lower tax bills or generate tax refunds.
What tax relief is available?
For Small and Medium companies, from 1 April 2012 the tax relief on allowable R&D costs is 225% which means that for each £100 of qualifying costs, the company can deduct a £225 expenses against its taxable profit.
If the company is loss making for tax, then this tax relief may be used to trigger a repayable tax credit, which can greatly assist companies in early developmental stages of work.
Large companies are only eligible for a smaller uplift on their expenditure.
You must make any claim for R&D Relief in your Company Tax Return or amended return. The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period.
What is R&D?
R&D tax reliefs were introduced to encourage companies to undertake innovative work, and to recognise that the costs of such developmental work should be recognised as a running cost of the business. Since they were introduced, the scheme has become much more generous.
R&D takes place when an overall project seeks to achieve an advance in science or technology. Where R&D is being done by a company, certain costs of undertaking that R&D may qualify for R&D tax credits. Principally these are expenditure on:
The tax reliefs are available for companies of any size, although the smaller the company, the more generous the tax reliefs. In basic terms, for the more generous Small and Medium size tax reliefs you need to have less that 500 employees, and either turnover below €100 million or a balance sheet not exceeding €86 million. By process of elimination, if your company is bigger than this, it is a Large Company.
How to recognise R&D expenditure
R&D is something that seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. It is not simply an advance in its own state of knowledge or capability.
HMRC will be looking for answers to the following questions in order to be satisfied that there is genuine R&D:
1. What is the scientific or technological advance?
Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.
Science does not include work in the arts, humanities and social sciences (including economics).
It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
2. What were the scientific or technological uncertainties involved in the project?
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.
3. How and when were the uncertainties actually overcome?
Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.
4. Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case a valid technological uncertainty can still exist.
Alternatively, if the project is one where there is little public information available, you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
What costs qualify?
Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company or organisation – not consultants, agency workers, or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors.
Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D. The staff provider needs to contract with the individual whose services they supply – not through another person.
Materials – consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs.
Payments to clinical trials volunteers – the cost of relevant payments to subjects of clinical trials.
Utilities – power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
Software – computer software used directly in the R&D.
Subcontracted R&D expenditure – if your company or organisation is claiming relief under the SME Scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor. But if the subcontractor is connected to your company or organisation, or you have jointly elected for connected parties treatment, special rules apply. If your company or organisation is not a SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.
Many subcontractors believe that they cannot claim R&D Relief, but that is not strictly accurate. Whilst the more generous tax reliefs are not available, sub-contractors can still claim the same types of relief as a Large Company.
Although R&D Relief is only available for ‘revenue expenditure’ (generally, day-to-day running costs, as opposed to capital expenditure), if you are involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
Subsidies and grants
If your company or organisation has received a subsidy or grant for an R&D project, this may affect how much tax relief you can claim. If the subsidy or grant is a ‘State Aid’ recognised by the European Commission, then you can’t claim anything under the SME Scheme. For any other type of subsidy or grant, the R&D expenditure you can claim for is reduced by the amount of subsidy or grant received.
You may be able to claim under the Large Company Scheme instead. But you can only do this if both of these are true:
If you do claim under the Large Company Scheme, then the large company rules apply. The rate of tax relief is lower, and you can’t convert the relief into payable tax credits.
How we can help
We have expertise in assisting you to review whether you would be entitled to make a claim, compile that claim and deal with HMRC on your behalf.
The key to making a succesful claim is in presenting the correct information, in the correct format, within the correct timescale and with the correct level of supporting evidence. This is where our experience and expertise can prove invaluable in ensuring that your claim
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