R&D Tax Credits: The Frequently Asked Questions
Research and Development (R&D) tax relief was first introduced by the government in 2000, and was a focal point of their strategy to actively encourage innovation and business development across the United Kingdom. Whilst the relief was initially targeted at small and medium sized enterprises (SMEs), HMRC relaxed the thresholds for applicants in 2002, meaning larger companies (LCs) were also eligible to claim.
On 23rd November 2016, in a move welcomed by UK Research Councils, Chancellor Philip Hammond announced in his maiden Autumn Statement that an additional £2 billion a year was being made available for R&D until the end of the current parliament.
With the fresh cash injection to the scheme in mind, Raj Nayyar, Tax Manager at UNW, answers some of the frequently asked questions surrounding the R&D application process.
What qualifies under the R&D banner?
For tax purposes, R&D takes place when a project is undertaken which seeks to achieve an advance in science or technology. The activities that contribute to achieving this advance through the resolution of scientific or technological uncertainty are R&D. Don’t let the words science and technology discourage you from investigating this further, there is a wide array of activities businesses can undertake to qualify. To dispel the myth – it’s not just “white coat” activity that will qualify as R&D.
When claiming for R&D tax relief, what are the thresholds for businesses?
Whether a business falls under the SME or LC threshold depends simply on size and turnover, and will have ramifications on the amount of relief they can claim.
Broadly speaking, if an organisation has fewer than 500 employees, a turnover less than £100m, and a balance sheet that does not exceed £86m, it will qualify as an SME. These rules, however, should be considered in further detail if a company is part of a larger group. The attributes of LC are simply above these thresholds. It’s been a common misconception in the past that R&D relief is reserved for larger organisations; this simply isn’t the case, and the government actively encourages smaller companies to claim.
If my business filed a successful R&D claim, what benefits would it see?
Depending on profits, a company will benefit from R&D claims via either a reduction in their corporate tax liability or, in some cases, by receiving a cash repayment.
SMEs receive an additional 130% enhanced rate of relief, so if an SME incurred £100,000 of qualifying R&D, they would obtain an additional £130,000 of deductible expenditure. Based on the current 20% rate of corporation tax, the SME would receive a cash tax saving of £26,000. It is worth noting that the corporation tax rate will be reducing to 19% effective from the 1st April 2017.
If the SME is operating at a loss, the company could surrender the lower of its taxable loss or R&D expenditure in the period, in return for a cash repayment of 14.5%.
On the other hand, if a LC is making a claim, the LC can reclaim 11% of the R&D expenditure incurred under the large company Research and Development Expenditure Credit (‘RDEC’).
Are R&D claims restricted to certain sectors?
Certainly not, businesses across a wide range of sectors have benefited from R&D tax credits, but management teams often underestimate how innovative the work their company undertakes is. In our experience, we have seen claims made by companies in all industry sectors including IT, architectural, manufacturing, pharmaceutical and service sectors, to name but a few.
Typical costs included in an R&D claim include staffing costs, expenses for software and expenditure on consumable or transformable materials. To the extent that these costs are utilised for the relevant R&D activity, they are eligible costs to include within a claim.
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