As part of the government’s continuing aim to attract new companies to the UK to create growth and jobs, significant changes have been made to the tax rules over the last few years to encourage research and development (R&D) activities and valuable corporation tax reliefs are available to companies undertaking such activities.
It is often the case that companies incorrectly view the R&D tax reliefs as only being available to ‘traditional’ R&D industries, such as pharmaceuticals and medicine. However, R&D relief is not restricted to particular industries. It is available to all companies provided the activities undertaken are qualifying R&D activities.
Qualifying R&D activities
To qualify for R&D tax relief, the company’s activities must fall to be accounted for as R&D under generally accepted accounting standards. The tests for identifying eligible R&D activity are found in the guidelines issued by the Department for Business Innovation and Skills. The guidelines state that to make a claim for R&D relief a company must be able to demonstrate that the activities it is carrying out relate to a technological or scientific uncertainty and the activities seek to achieve an advance in overall knowledge or capability (meaning the activity cannot not be for the benefit of the company alone). Projects can include the improvement of existing products or methods, or the creation of new ones.
A claim for R&D tax relief can only be made where there is sufficient evidence to prove the activities undertaken and the costs incurred. Accounting systems must therefore be set up to ensure that the correct records are kept and R&D expenditure is easily identifiable. To achieve this the finance department must communicate with the department undertaking the R&D activities so that qualifying activities are properly identified and the necessary supporting information is captured.
Relief for SMEs
The effect of R&D relief is that a small or medium sized company (SME) may claim a deduction equivalent to 225% of the qualifying R&D expenditure against its taxable profits. Qualifying expenditure includes staff costs (including national insurance contributions and pension contributions), materials, utilities, software, subcontractor costs and externally provided workers. For example, if an SME incurs qualifying R&D costs of £10,000, the company can claim a tax deduction of £22,500 for those costs.
In addition, where the enhanced deduction results in the company making a loss, the loss can be surrendered for a tax credit which is payable to the company by HM Revenue and Customs. The tax credit is calculated at 14.5% of the loss surrendered and there are no restrictions on this credit, the company may spend it however it chooses. These additional funds can be particularly helpful for companies starting-up and the tax credits are not taxable.
Further information is available in our factsheet here.
Relief for large companies
Any company that does not meet the definition of an SME will be a large company for the purposes of R&D relief. The super deduction of 225% is not available to large companies, neither is the payable credit. However, there is an enhanced deduction of 130% available.
From 1 April 2013, an ‘above-the-line’ R&D credit has been available to large companies, known as the Research and Development Expenditure Credit. Initially this is an alternative to the existing 30% uplift, but the uplift will cease to be available for expenditure incurred on or after 1 April 2016 and the above the line tax credit will be the only option available to large companies.
The R&D relief can prove valuable for companies of any size and should always be kept in mind by any company developing new products or ideas. It is essential that detailed records are kept to support any R&D expenditure and the basis for any apportionment of expenses between activities.
Should you have any questions, or if you would like further information about R&D tax relief please contact your usual Moore Stephens adviser.