Is your company undertaking creative or innovative work in the fields of science or technology? The company may be eligible to claim significant additional tax relief, resulting in lower tax payments or a cash receipt from HMRC, even where no tax has been paid.

Some companies may not realise they are carrying out research and development (R&D), as their accountants or finance directors may only be looking at 'wages and salaries' in the accounts, or perceive that the complex rules seem to get in the way.

R&D is not restricted to the oft-cited life sciences, but covers companies in virtually every industry which are undertaking some form of innovation; this includes innovation in products and services, as well as in their support functions.

Industries for which we have successfully made claims include construction, advertising, telecoms, financial services, and gambling, as well as the more obvious manufacturing, energy, defence and life sciences industries. The software, internet and communications spheres are good examples where R&D takes place in supporting functions as well as industries in their own right.

What is R&D?

In the first instance, R&D is defined by reference to projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones.

Only publicly available knowledge need be assumed, so that R&D may be undertaken even where similar development has been undertaken by a competitor, for example, but retained as a trade secret.

There is, inevitably, considerable ambiguity in many cases, so each case must be looked at on its own merits.

What is it worth?

As the corporation tax rates for small companies get closer to the large company rate, the relief falls to around 26% of cost (from 1 April 2015 the small and large company corporation tax rates are aligned at 20% and the uplift for SME R&D relief increases to 130%), still a very beneficial relief.

Where an SME is lossmaking, the relief can give rise to cash repayments of over 33.3% from 1 April 2015 of the cost, even where no tax has ever been paid. This is of considerable assistance to the start-up in need of cash to fund the R&D.

SMEs

To qualify for the SME reliefs, the company, together with appropriate proportions of any 'linked' or 'partner' enterprises, must have:

  • fewer than 500 employees; and
  • either:
    • turnover not exceeding €100m; or
    • balance sheet total not exceeding €86m.

There are complex transitional rules for companies which become or cease to be SMEs.

The definitions of linked or partner enterprises and the proportions to be used are also complex, and may include, for example, companies owning 25% of the company or being 25% owned by the company.

For details on R&D carried out by or for large companies, see our flyer: https://www.smith.williamson.co.uk/uploads/publications/RD-tax-credits-large-companies.pdf

Qualifying expenditure

Qualifying R&D expenditure must be revenue expenditure on:

  • employee and agency costs
  • software and consumables
  • subcontracted expenditure (for SMEs)
  • certain indirect expenditure.

These are all subject to complex definitions, and HMRC has its own views on certain aspects.

In the case of agency costs, or subcontracted R&D, only 65% of the cost qualifies for this uplift unless certain elections are made.

To the extent R&D is funded or subsidised by an EU notified state aid, the project will not qualify at all for the SME scheme but may qualify under the scheme for large companies (as for R&D subcontracted to them, or project-certified R&D). If only partly funded and not with EU state aid, the unfunded part may so qualify.  

Revenue expenditure capitalised in the accounts is not necessarily excluded, and if capitalised into tangible fixed assets, might only qualify on a depreciated basis, if at all. Capital expenditure may qualify for R&D capital allowances. Advice should be sought in this difficult area.

Making claims

There are numerous other rules, including the restriction that an R&D tax credit may only be claimed or paid where the company remains a going concern.

Finally, claims have to be made within two years of the end of an accounting period, and HMRC give no leeway here.

HMRC has special R&D units which consider claims carefully, so it pays to prepare and present them carefully.

What we offer

We have a team of corporate tax advisers dedicated to working with companies involved in R&D. With specialist knowledge in this area, we can help you maximise your R&D claims and ensure that they are realistic and robust.

Working with your company, we can:

  • assess the viability of an R&D claim in the light of your activities
  • review your activities and costs to determine which qualify for R&D tax relief, and advise on uncertain areas
  • advise on how to structure companies and contracts to maximise the R&D tax relief
  • advise on record-keeping requirements and accounting system structures to ensure the R&D tax relief claim is maximised
  • prepare and submit claims and reports to HMRC with a view to maximising the R&D claims yet minimising exposure to penalties.
  • help to ensure cash is received promptly from HMRC
  • deal with HMRC correspondence and enquiries regarding a claim.

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2015. code: NTD267 exp date: 30/04/2016