This helpsheet sets out important information in relation to enhanced claims for Research and Development (R&D) work carried out by small or medium enterprises (SMEs).
What is the R&D tax relief?
An SME can currently claim a 230% deduction from taxable profits (225% for expenditure incurred before 1 April 2015) for qualifying expenditure on R&D activities.
So for every £100 spent on qualifying R&D, £230 of relief is obtained. Effectively therefore the net cost of R&D for a profitable SME is only £54 per £100 spent.
R&D Tax Credit
If the SME is loss making for the period, then they may be able to surrender all or part of the loss and claim a repayable tax credit from HMRC. The surrenderable amount is the lower of:
- The unrelieved trading loss; and
- 230% of the qualifying R&D expenditure (225% for expenditure pre 1 April 2015)
The repayment is 14.5% (11% for expenditure incurred pre 1 April 2014) of the surrendered loss.
So for a loss making company carrying out £100,000 of qualifying R&D, a cash credit of up to £33,350 could be recovered.
Who benefits from R&D tax relief?
- Companies developing new, or improving existing products or processes even if unsuccessful
- Companies with patented or patentable products
- Companies who are industry leading or innovative
Who is eligible for the SME tax relief scheme?
Companies will qualify for the SME scheme if they, including linked and partner enterprises, have:
- Not more than 500 employees; and
- Less than €100m of turnover or less than €86m gross assets</li
- Companies who have developed their own software
The company must also meet the following criteria:
- It must have carried out qualifying R&D
- The project must not have been funded, partly or in full, by State Aid
- The project must not be entirely funded by someone else (a reduction in the claim applies)
What is qualifying R&D?
The DTI guidelines state that R&D is qualifying where there is a project seeking to achieve an advance in science or technology by:
- Extending overall knowledge in a field
- Using science or technology to develop an existing process, material, product or service in a new and appreciably improved way
- Creating a process, device, product or service which represents an increase in overall knowledge or capability within a field
In practical terms, any project undertaken by company which faces challenges or difficulties into which money and/or time has been invested (whether successful or not) may qualify for relief.
What expenditure can be included in the claim?
Expenditure incurred in the resolving of technological or scientific uncertainty can be included in relation to the following:
- Staff costs of employees involved, apportioned based on their time spent on qualifying activities
- Costs of subcontractors involved in the R&D process (normally restricted to 65% cost) such as work undertaken by other companies or universities.
- Externally provided workers (normally restricted to 65% cost) such as agency workers involved in R&D.
- Software used in R&D, apportioned between qualifying and non-qualifying activities.
- Items which are consumed in the R&D process, for instance in materials used in developing prototypes as well as fuel, power or water consumed in the process.
- Other qualifying indirect activities
Making a R&D tax relief claim
Claims are made through the company’s corporation tax return and these R&D claims are reviewed by specialist units at HMRC. As such it is important that sufficient information is provided alongside the computation for the claim to be processed. This includes details of:
- The nature of the project
- The scientific or technological advances sought
- The scientific or technological uncertainties encountered and how and when they were resolved
- Why the advances were not readily deducible by a competent professional
- Details of qualifying expenditure
How can Menzies help?
Menzies Innovation and R&D Team works in partnership with clients and other professionals to provide a commercially relevant and effective tax planning service, from concept development through to collating and presenting claims in a format to expedite the R&D tax claims process. This includes:
- Navigating you through the claims process from recording, reporting and final submission
- Identifying and, improving methods for identifying, qualifying expenditure to maximise effectiveness of the reliefs
- Specialist knowledge of the R&D tax regime
- Identifying, and developing systems to identify, qualifying projects
- Presenting information to minimise exposure to challenges from HMRC
Considering other relevant or complementary tax reliefs that may arise from the development process