RESEARCH & DEVELOPMENT TAX CREDITS
Many companies carrying out research and development aren’t aware of the ability to reduce their tax bill by making a claim for Research and Development Tax Credits, which can make a significant difference to their tax bill. Sheth & Co provide answers to the most frequently asked questions on R&D tax credits and include a successful case study as an example of how one company has benefitted from a tax reduction of over £50,000 to fund its innovation strategy.
The definition of Research and Development (R&D) for tax purposes is wider than many businesses realize and offers many opportunities to secure additional tax benefits. The majority of companies carry out some form of R&D, even if they don’t think of it strictly in those terms. The current definition covers both applied and pure research, as well as product development activities where an appreciable element of innovation exists.
The potential tax benefits include 100 percent relief for qualifying capital costs in the year of expenditure, available to companies of all sizes. In addition, relief is available by way of a deduction for qualifying revenue costs; broadly, these are staff costs and consumables. For a small- to medium-sized enterprise the deduction is £1.75 for every £1 of qualifying R&D; SMEs (Small and Medium Sized Enterprises) – with losses may surrender their deduction for a cash payment. Large companies are entitled to a deduction of £1.30 for every £1 of qualifying R&D but without a corresponding cash repayment for loss making large companies.
This is an annual tax benefit which your company should claim.
Some key questions for your business:
• Are you ignoring the potential tax benefits of claiming for R&D relief?
• Do you understand what constitutes qualifying expenditure?
• Does your R&D activity qualify in practice?
• Do you know how and when to submit the relevant claims?
Some FAQs regarding R&D Tax Credits:
• We haven't yet made a claim. Does this mean we can’t go back and make a claim for previous years?
No. Broadly it is possible to go back up to two years to make a claim.
• Do amounts paid to a University qualify for relief?
Where a university conducts R&D on behalf of a company, the amounts paid to the university would usually qualify for relief. This is the position under the scheme for SMEs and also for large companies. Large companies are also able to claim relief for contributions made to universities and similar bodies to fund independent research.
• Is it correct that we are unable to claim the overhead costs incurred in assembling prototypes in-house?
For prototypes assembled in-house it has only been possible to claim the related staff and materials costs.
• Can we claim for the employees that support the R&D activities, such as the finance and administrative staff?
Staff indirectly involved in R&D will not qualify for relief. This includes financial, clerical and general administrative staff. However, staff providing support for the research effort should qualify, for instance QA staff.
• Am I restricted from claiming relief on R&D where it is paid for in whole or in part by a customer? This could be a situation where we are paid for conducting the R&D itself, regardless of the successful delivery of a product to the customer.
Under the large company scheme, relief is available on a company's gross costs, irrespective of whether these costs are funded by a customer. As an SME you will be unable to claim the SME R&D relief on this project. This is because you cannot claim the SME relief for R&D contracted into the company, which is what this scenario appears to be. If your customer is a large company, you may actually be able to claim the large company R&D relief instead. As this is a complex area, we recommend that such scenarios are considered in detail before assessing the availability of relief.
• Can I claim R&D tax relief on the cost of new capital equipment used in R&D activities?
No. R&D tax relief is not available on any capital expenditure. It is only available on revenue expenditure.
• My company is profit making. How can we benefit from this relief?
The relief is given by providing an additional deduction in computing the overall profits chargeable to corporation tax. The additional deduction is 75 percent of qualifying expenditure for SMEs and 30 percent for large companies. Companies can therefore realise the value of the relief in calculating their corporation tax instalment payments.
• My company is loss making. Is the relief of any benefit to us?
Loss making SMEs can claim an R&D tax credit, crystallising a cash repayment from HMRC. This arises even if the company has never paid any corporation tax. In this instance, the repayment is capped by reference to the PAYE and NIC paid by the company in the period, although this usually does not come into play, unless a significant proportion of the R&D activities are sub contracted out. The cash repayment is effectively calculated at a discount from the value obtained where the enhanced deduction is simply relieved against trading profits. It may therefore be beneficial for a loss making SME not to claim the cash repayment, for example where corporate profits are expected in the near future. The cash repayment option is not available to large loss-making companies. They have to carry forward any enhanced loss in the usual manner and utilise them against profits in future periods.
• I work for a small company which itself falls within the SME definition, but we are owned by a large company. Would we qualify for the SME or large company R&D tax relief?
In this instance your company would qualify for the large company relief. This is because the SME definition includes provisions which stop smaller companies being SMEs if 25 percent or more of their capital or voting rights is owned by a large company.
• My company is small, but is partly owned by a large venture capital (VC) company. Does this stop me claiming the relief for SMEs?
Investment by a VC should not affect the SME status of the company, provided the VC holds the shares as a "passive" investment and does not exercise control over the conduct of the companies business. This is one of the exceptions to the rule outlined above. Again, this should be considered in detail before assessing the availability of relief.
• What documentation needs to be sent to HMRC in support of the claim?
HMRC has stated that they require a brief synopsis of the R&D activities, which should be written in layman's terms. They also require an analysis of the expenditure being claimed.
The regime in the UK is not like those in the US, Canada and Australia, where very detailed project descriptions are required.
THE KEYS TO SUCCESS IN A CLAIM:
1. Identify that the company undertakes Research & Development
2. Identify the expenditure
3. Document how the expenditure undertaken represented work undertaken in overcoming technological challenges.
4. Documenting how the claim met the requirements of the legislation
5. Identify where the Intellectual Property rights lie.
6. Ensuring that the claim meets the legislative requirements – involve a professional tax adviser to assist you.
Contact Sheth & Co, Chartered Accountants and Chartered Tax Advisers for professional advice on (024) 76 601099 or e-mail on
or visit the website at http://www.sheth.co.uk.
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