Should you be claiming R&D tax relief?
HMRC statistics show that companies in Scotland are still not taking full advantage of the research and development tax reliefs available where they are carrying out qualifying projects.
The R&D Tax Relief scheme was introduced in the UK in 2000 and over recent years the government has substantially increased the tax reliefs available to UK companies who are carrying out research and development.
From 1 April 2013 a major change was introduced to the R&D tax relief for large companies and SMEs which fall under the large company scheme. Rather than claiming a super-deduction as part of their tax computations, these companies are now entitled to a taxable R&D Expenditure Credit in respect of their R&D projects equivalent to 8% of the qualifying spend, net of corporation tax.
From 1 April 2015 companies which are classified as either small or medium sized that are carrying out their own R&D are entitled to claim a super-deduction against their taxable profits equivalent to an extra 130% of the actual qualifying expenditure which is incurred. This can result in greatly reduced corporation tax liabilities or, if the company is loss making for tax purposes, a cash tax credit equal to 33.35p in the £1 is paid to the company by HM Revenue and Customs.
This credit will be accounted for ‘Above the Line’ in the claimant company’s profit and loss account meaning that the value of the R&D relief will be easily quantified and visible rather than being reflected in the company’s tax charge. Because the new R&D Expenditure Credit for large companies is taxable, the rate of cash benefit depends on the mainstream corporate tax rate in that year, this is illustrated below:
|Maximum value of the R&D tax relief/credit as a percentage of qualifying spend (ie the potential amount of the cash benefit)|
|SME scheme – additional tax relief||SME scheme – surrenderable tax credit||Large company scheme – tax relief||Above the Line – tax credit|
|Tax Year||Mainstream corporate tax rate||%||%||%||%|
The definition of what constitutes R&D under the large company scheme is the same as for an SME business so if a company transitions from the SME scheme to the Large scheme either through growth or, for example, the receipt of the wrong kind of grant funding, its R&D projects will still qualify for relief, but at the different rate.
R&D Tax Relief – Do you qualify?
R&D tax relief is available to companies liable to UK Corporation Tax that carry out projects that seek to achieve an advance in science or technology. For these purposes science includes all disciplines of engineering, as well traditional academic sciences and software development. Technology is simply the application of scientific principles in a practical commercial setting. As a result of this the breadth of industries and sectors that should consider whether they are undertaking qualifying R&D is vast.
If you answer ‘yes’ or ‘maybe’ to the questions below, your company could be carrying out qualifying R&D:
- Has your company developed new products, processes or services using science or technology?
- Have you utilised science or technology to make improvements to your existing products, processes or services?
- Has your company had to resolve technical problems with your products, processes or services?
- Has your company developed more efficient ways of creating your products or services?
- Has your company purchased experimental equipment or experimented with new or improved production techniques?
- When you commence working on a new product, process or service, is it not obvious at the outset which is the best way to proceed?
- Do you ever publish or present details of your work to other professionals in your sector?
The following triggers can be used to identify companies that may be carrying out R&D, regardless of the sector:
- They are likely to be market/industry leaders
- Their products may have been nominated for, or won, industry awards
- They are likely to have high profile customers who come to them because of their specialist abilities
- They are likely to have developed their own intellectual property through the work they have carried out
- The staff which they employ for key business areas are usually highly qualified
- Some of the projects are likely to be commercially secretive or covered by non-disclosure agreements
- Their websites will usually highlight that their products and services are innovative in some way
Please contact us if you would like further details on any of the above.