R&D tax credits can either reduce a company’s tax bill, or in some cases, provide a cash sum for those yet to make a taxable profit…
The Government first introduced the concept of tax credits for expenditure on R&D in April 2000. However, it would appear that many companies who could qualify are missing out on these valuable incentives; if this applies to you it’s never too late to appraise your circumstances. Here is a recap of the basic rules.
The tax reliefs available
Where a small or medium sized enterprise (SME) satisfies the qualifying conditions below, the company can make a claim to uplift its qualifying expenditure on R&D by 75% for tax purposes. This means that for every £100 of qualifying expenditure, the company can claim £175 as a deduction against its taxable income. For expenditure incurred prior to 1 August 2008, the rate of uplift was 50%.
In addition, loss-making companies can also claim a repayment of tax equivalent to 24% of their qualifying expenditure. However, this is restricted to their total PAYE and NIC costs payable in the year. This can therefore result in a significant cash-flow benefit, particularly in the start-up phase or early years of the business.
The above reliefs apply only to expenditure which is revenue in nature. Capital costs (for example, those relating to the purchase of equipment used in the R&D process) may instead qualify for enhanced 100% capital allowances.
What exactly is meant by R&D?
Whereas the definition is somewhat complex, the R&D of the company must broadly entail an appreciable element of novelty that results in a scientific or technological advance or a clarification of an area of scientific or technological uncertainty. For example, in a software project, it may be necessary to demonstrate that software relies on newly developed algorithms or architectures which break new ground in the industry sector as a whole.
R&D can also include the design of products and services and software involving new technology or substantially improving existing products and services. This definition also includes the construction of prototypes. HM Revenue and Customs (HMRC) do not however consider piecemeal improvements of an existing product or service to be R&D.
When making a claim, the company must be able to demonstrate to HMRC that the product or service is truly innovative, cutting edge and, at a technological level, an advance on what is currently available in the market.
Conditions to be satisfied
The company must satisfy the following conditions:
It must be an SME and this is broadly defined as follows:
- Have less than 500 employees; and
- have an annual turnover not exceeding €100million; and/or
- have gross assets on its balance sheet total not exceeding €86million.
If the company is part of a group, the group must satisfy the above limits. Please note that prior to 1 August 2008, these limits were halved.
Other conditions are:
- The company must own the rights to any intellectual property (for example, trademarks or patents) generated as a result of the R&D;
- the company must have incurred the minimum qualifying expenditure of £10,000 in the accounting period for which the R&D claim is being made;
- relief is available only for qualifying expenditure (as defined below) incurred on R&D which is revenue in nature and which is not externally subsidised.
Any company that exceeds the size criteria for SMEs as described above is treated as ‘large’ but may still qualify for tax breaks, as set out below.
Qualifying expenditure
For these purposes, qualifying expenditure includes gross staff costs (although benefits in kind are generally excluded), 65% of sub-contracted R&D expenditure and the cost of items used up in the development process. It is also now possible to claim for the cost of software and power such as gas and electricity directly used in the R&D process.
What happens if you are a sub-contractor for R&D purposes on behalf of a large company?
Further reliefs were introduced by HMRC under the so-called large company regime for expenditure incurred on or after 1 April 2002. Where an SME carries out R&D on a sub-contract basis for a large company, the enhanced rate of tax deduction is currently set at 130% with effect from 1 April 2008 (previously 125%).
Large companies themselves can also obtain an enhanced deduction at the same rate on their own qualifying expenditure. They are not able to generate a tax repayment on losses; however it is not a requirement that they own the intellectual property rights arising from the expenditure.
Summary
The R&D tax relief regimes provide significant incentives to companies undertaking ground-breaking research and development work. However, it is important that professional advice is sought at an early stage so as to ensure that the various qualifying conditions are met and suitable documentation is retained in support of a claim.
Vantis has to date generated tax refunds of over £1.5million for its clients investing in R&D. If you would like further advice as to how Vantis may be able to help your business, please enter your details and submit the online form below.