Good work has been done to support the UK’s most innovative companies and recent years have seen significant improvements to tax incentives for innovation.
R&D Relief is a Corporation Tax relief that may reduce a company tax bill. If your organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue and Customs.
There are essentially two schemes, one for Small & Medium Enterprises (SME’s) and one for larger businesses.
Under the SME regime, a company can obtain an additional deduction of 130% for qualifying expenditure, so for each £100 spent, a tax deduction of £230 is available.
The rate at which losses can be surrendered for a payable credit under the SME scheme stays at 14.5%, so loss making SME’s will receive a cash credit of 33.35 pence for every pound spent on qualifying R&D.
Example: R&D Relief for expenditure of £20,000 where the company has made a loss of £10,000.
For larger companies there are currently two R&D tax credit regimes running in parallel. In this respect, a company is large if it, together with appropriate proportions of any ‘linked’ or ‘partner’ enterprises has: 500 or more employees, or turnover exceeding €100m and balance sheet total exceeding €86m.
Research & Development Expenditure Credit (“RDEC”).
From 1 April 2015 relief is given at 11% of qualifying R&D expenditure. Profitable companies can offset the RDEC against their corporation tax liability. Loss makers may cash in the credit, or carry forward against future profits.
This is a relatively recent development in the larger company scheme, since prior to 2013, loss makers would have no option but to carry forward. As such, many companies, for example loss-making subsidiaries of large overseas groups, ignored the R&D tax relief regime or perhaps did not attempt to optimise their position, as the value of increasing a carry forward loss sometimes made the benefits less attractive.
The other scheme available to larger companies, under which an additional deduction of 30% of qualifying expenditure may be claimed, but with no option for a cash-payable credit, will cease in 2016.
There’s no specific record keeping requirement for R&D Relief claims. But the general Corporation Tax requirement to keep sufficient records to support the entries on your Company Tax Return still applies.
It is important to note that the eligibility for these incentives extends far beyond activities undertaken in laboratories and dedicated science-based research centres. R&D activity does not necessarily have to result in the creation of a tangible end product and it does not need to lead to a successful outcome.
If you’ve any questions about R&D Relief, EBS will be happy to help you.
You can also contact specialist HMRC unit before making a R&D Relief claim, or while you are putting together your claim.