Research and Development
Introduction
Companies (not unincorporated businesses) can claim an enhanced relief against taxable profits on qualifying research & development (R&D) expenditure. This can even lead to a company receiving cash back from HM Revenue & Customs (HMRC) if the claim creates or enhances a tax loss.
There are two schemes, the SME Scheme and the Large Company Scheme. They are very similar in most respects with the major exception of the rate of enhanced relief.
The SME Scheme provides a 75% enhanced relief, i.e. for every £1 qualifying spend the taxable profit is decreased by or tax loss increased by a further 75p.
For the Large Scheme, the enhanced relief is 30%.
For the SME Scheme only, a loss can be surrendered for 14% of the uplifted qualifying expenditure. This is capped at the total PAYE and NIC in the accounting period.
The two schemes are both Government incentives and are not based upon tax loopholes.
What is R&D?
HMRC provides plenty of guidance on this issue but, to summarise, the company must be seeking a scientific or technological advancement and is faced with scientific or technological uncertainty.
The R&D can be a product or even an internal process.
Qualifying Costs
Only certain categories of expenditure qualify for the relief. These are:
- Staff costs including employer pension contributions
- Materials consumed
- Heat, light, water
- Software
- Subcontracted costs (SME Scheme only)
- Externally provided workers
- Clinical trial volunteers
There is a £10,000 minimum spend criteria within a 12 month accounting period.
There is a time limit of two years from the end of the accounting period to make a claim.
Capital Expenditure
R&D assets may also qualify for a special relief, being a 100% capital allowance in the year of acquisition.
The Armstrong Watson approach
We have been making claims for this tax relief since its introduction in 2000. The rules have changed on numerous occasions and can be complex. The information above is only a very simple summary of the relief.
We can assist in advising on what is and what is not R&D and help companies compile the information in order to make a claim. We pull all this information together into a format acceptable to HMRC in order to keep the chances of an enquiry to a minimum.
We have had successful claims in the following sectors:
- Manufacturing
- Engineering
- Electronics
- IT
- Pharmaceuticals
Common Misconceptions
- We are not doing R&D – many companies do not initially realise that their project is R&D
- Claiming the relief is complicated – not if you seek good advice
- The costs of claiming outweigh the benefits – this is rarely the case
- We cannot separately identify costs – HMRC does not expect the company to reinvent its accounting records to make a claim and will accept some elements of estimation
- We received a grant towards R&D, we cannot have the tax relief too – this is by far the biggest misconception. The receipt of a grant may affect how much additional tax relief the company can claim but you can have both!
For more information on the relief and to arrange a free no obligation meeting contact Nigel Holmes, Director – Corporate Tax, e: nigel.holmes@armstrongwatson.co.uk
