Laurence Bard looks at the opportunities potentially missed by companies not claiming R&D tax relief.
Despite being on the statute books for over a decade, and gradually increasing in size and scope over this period, qualifying companies are still failing to claim hugely valuable research and development (R&D) tax reliefs – usually because they don't realise they are eligible.
Location of R&D
UK-quoted international groups are often unaware that you don't have to carry out R&D in the UK to make a claim. Many groups have overseas subsidiaries and conduct little R&D activity in the UK. But if they carry out R&D activity overseas within a UK-resident company, they are still eligible for the benefits of the UK R&D regime. Company profits subject to the UK's main corporation tax rate are currently taxable at 24% (year to 31 March 2013), but this reduces to 21% by April 2014.
R&D relief is currently given as an enhanced deduction, but from April 2013 there will be the option of obtaining an R&D credit instead. Should profits qualify for the patent box regime these will be taxable at rates of around 10%, subject to the staged introduction of this rate from April 2013 to 2017. Provided R&D activity is of a sufficient level for companies within the patent box regime, the R&D tax relief should still be available at the non-patent box rate of corporation tax.
What qualifies as R&D?
Projects must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty to qualify as R&D. Such work may be undertaken even where similar development is instigated by a competitor but retained as a trade secret. This issue inevitably raises considerable ambiguity, so each case must be looked at on its own merits.
R&D is not restricted to the oft-cited life sciences but covers companies in virtually every industry undertaking some form of innovation. This includes innovation in products and services, as well as in their support functions.
Industries include construction, resource and exploration, advertising, telecoms, financial services and gambling, as well as the more obvious manufacturing, energy, defence and life sciences. Software, internet and communications are good examples of industries where R&D takes place in support functions, as well as within the industries themselves.
Qualifying R&D expenditure includes employee and agency costs, software and consumables and sub-contracted expenditure. All are subject to detailed rules and interpretation.
What's it worth?
The extra relief can now be worth 31% of the cost to a company paying tax (for certain profits taxable in the year to 31 March 2013). Alternatively, where a company is making a loss the relief can result in tax repayments of as much as 25% of the cost, even where no corporation tax or NICs for periods ending after 31 March 2012 have ever been paid. This is of considerable help to start-ups in need of cash to fund their R&D.
To qualify for these levels of R&D relief the company must be an SME. This means they should have fewer than 500 employees and either turnover not exceeding €100m or a balance sheet total not exceeding €86m, including any associated companies. Relief is still available for large companies but at a lower level.
Making a claim
There are numerous other rules that will also need to be considered. Any claims must be made within two years of the end of the relevant accounting period. HMRC gives no leeway on this and also has special R&D units that consider claims in detail, so it pays to prepare them carefully.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
