05 October 2011
Research and Development tax relief – It’s worth how much?
Very few tax reliefs are as valuable as the relief available to companies undertaking R&D activities. The tax deduction to be obtained on expenditure on R&D can be worth up to 225% of the actual cost incurred and in certain circumstances companies may even be able to claim a tax credit. This article explores this precious relief in more detail.
R&D tax relief is only available to limited companies, and there are essentially two schemes for claiming relief, depending on the size of the company:
- The Small or Medium-sized Enterprise (SME) Scheme
- The Large Company Scheme
The rate of relief available under the SME scheme is higher than under the large company scheme, but the definition of a SME for R&D Relief purposes is not necessarily the same as that used by HMRC in relation to other areas of tax and care must therefore be taken.
The Small and Medium-sized Enterprise Scheme
Since 1 August 2008, the tax relief on allowable R&D costs has been 175 per cent - that is, for each £100 of qualifying costs, your company could have the profit on which Corporation Tax is paid reduced by an additional £75 on top of the £100 spent. It also includes a payable credit in some circumstances. The rate of SME R&D Relief increased from 175 per cent to 200 per cent for expenditure on or after 1 April 2011, and the rate will increase again to 225 per cent from 1 April 2012.
In certain situations, even if your company meets the definition of a SME, you may not be able to claim relief under the SME Scheme. But, you may be able to claim under the Large Company Scheme. This means that, if your company is small or medium-sized, you may be able to claim R&D Relief under the SME Scheme for one project and the Large Company Scheme for another.
If your company makes a loss, you may be able to choose to receive your tax relief by way of tax credits, a cash sum paid to you by HMRC, subject to certain conditions being met.
At the moment, tax relief is only available if you spend at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period, but the Chancellor announced in his 2011 Budget that this limit will be removed for expenditure incurred on or after 1 April 2012. There is no upper limit.
The large company scheme
Since 1 April 2008, the tax relief on allowable R&D costs has been 130 per cent - that is, for each £100 of qualifying costs, your company could have the profit on which Corporation Tax is paid reduced by an additional £30 on top of the £100 spent. If instead there is an allowable trading loss for the period, this can be increased by 30 per cent of the qualifying R&D costs - £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
Which costs might qualify?
If your company and the project both meet the necessary conditions for R&D, then you can claim tax relief on R&D revenue expenditure. Generally, this means costs incurred in the day-to-day running of the business, and not capital expenditure on assets.
The cost areas which might qualify and should be reviewed are:
- Employee costs;
- Staff providers;
- Software; and
- Subcontracted R&D expenditure.
Although R&D Relief is only available on revenue 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.
Which R&D projects might qualify?
Your company can only claim for R&D Relief if a project 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, and not simply an advance in its own state of knowledge or capability.
Your Wilkins Kennedy advisor would be happy to assist you in reviewing specific projects for eligibility and in quantifying your claim to R&D tax relief.