Despite being on the statute books for over a decade, there are still companies not claiming the hugely valuable research and development (R&D) tax relief.
This is often because they do not realise they are carrying out R&D, and nor do their accountants who see only ‘wages and salaries’ in the accounts.
R&D is not restricted to people in white coats holding test tubes, but covers companies in virtually every industry which are undertaking some form of innovation; this will include innovation in products and services, as well as in their support functions. Industries in which we have successfully made claims include construction, advertising, telecoms, financial services, and gambling as well as the more obvious manufacturing, energy, defence and life sciences industries. Software, internet and communications are good examples of R&D in supporting functions as well as industries in their own right.
What’s it worth?
Where a company is taxpaying, the extra relief can be worth 34% of cost.
Alternatively, where a company is lossmaking, the relief can give rise to tax repayments of as much as 25% of the cost, even where no corporation tax has ever been paid. This is of considerable assistance to start-up’s in need of cash to fund their R&D.
Small or medium sized enterprise (SME)
To qualify for these levels of R&D relief, the company must be an SME; in broad terms, this requires:
a) fewer than 500 employees, and
– turnover not exceeding €100m, or balance sheet total not exceeding €86m
– Not too difficult for most businesses!
What is R&D?
In the first instance, R&D is defined by reference to projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones.
Only publicly available knowledge need be assumed, so that R&D may be undertaken even where similar development has been undertaken by a competitor, for example, but retained as a trade secret.
There is inevitably considerable ambiguity in many cases, so that each case must be looked at on its own merits.
Qualifying R&D expenditure must be expenditure on:
a) Employee and agency costs
b) Software and consumables
c) Subcontracted expenditure
The company must have spent at least £10,000 on qualifying research and development in the accounting period but the £10,000 limit is scaled down for shorter accounting periods. The Finance Bill 2012 proposes removing this for periods ending after 31 March 2012.
R&D tax credit relief is given by increasing the deduction for qualifying research and development. The increase was originally set by enabling a deduction of 175% of qualifying expenditure for companies in the SME category. This was increased to 200% with effect from 1 April 2011, and to the Finance Bill 2012 proposes that this be increased to 225% from 1 April 2012. This increase (now equivalent to 100%) is known as the ‘uplift’.
In the case of agency costs, or subcontracted R&D, only 65% of the cost qualifies for this uplift.
The relief is also available to large companies, currently at a rate of 130% of qualifying expenditure, although currently subcontracted R&D costs do not qualify for relief except in limited circumstances.
R&D tax repayment credits
Where a company has a trading loss for tax purposes after taking the uplift into account, it may claim an R&D tax repayment credit in return for ‘surrendering’ this loss. This surrenderable loss is the lower of:
a) the trading loss adjusted for tax purposes, or
b) the qualifying R&D expenditure as increased by the uplift
The R&D repayment tax credit is then equal to the lower of:
a) 14% of the surrenderable loss (when the uplift of 75% applies – and lower equivalent percentages when the uplift goes up to 100% and 125%), and
b) The PAYE and National Insurance Contributions due for tax months ending in the accounting period. This limit is proposed to be removed for periods ending after 31 March 2012.
The combination of the 14% rate with the 75% uplift, or later equivalents, gives an effective refund of between 24% and 25% where qualifying R&D costs are exceeded by losses for the year.
Where the R&D tax credit is claimed, the trading loss carried forward is correspondingly reduced. The R&D tax credit will be paid to the company by HM Revenue & Customs, or may be set against any corporation tax or PAYE liabilities due.
There are numerous other rules, including the restriction that an R&D tax credit may only be claimed or paid where the company remains a going concern.
Finally, claims have to be made within two years of the end of an accounting period, and HM Revenue & Customs give no leeway here. They also have special R&D units who consider claims in detail, so it pays to prepare them carefully!
For further information on R&D tax relief, please contact Laurence Bard on 020 7131 4166 or email Laurence.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.