Research and development (R&D) occurs, for tax purposes, when a project consists of creative or innovative work in the field of science and technology, and is available to all companies (there is no minimum expenditure requirement for accounting periods ending on or after 1 April 2012).
Currently there are two schemes for R&D tax relief in the UK, depending on the size of the company.
1. Small and medium sized entities
A company qualifies as a small or medium sized entity (SME) for the purpose of the R&D regime if it has less than 500 employees and either turnover is less than or equal to €100m or the balance sheet total is less than or equal to €86m. This is an annual test.
SMEs can claim a 225% tax deduction for qualifying expenditure relating to qualifying activities for expenditure incurred on or after 1 April 2012. Loss-making SMEs may also be eligible to claim a repayable tax credit, limited to a percentage of the unrelieved losses attributable to R&D relief. This can be up to 25% of the qualifying R&D cost, even where no corporation tax (or PAYE/national insurance contributions for periods ending on or after 1 April 2012) has been paid.
2. Large companies
Large companies are those that do not qualify as an SME.
Large companies are entitled to a 130% deduction on all qualifying expenditure incurred on or after 31 March 2008. There is currently no payable tax credit available for large companies, although consideration is being given to the introduction of a repayable tax credit from April 2013.
Many companies miss out on tax relief by failing to claim R&D tax credits or relief. This may be because their R&D activities are integral to, or in support of, their overall trade and not something they specifically identify as being R&D, e.g. software development. However, upon investigation, these activities will often qualify for relief.
R&D relief at the enhanced rate only applies to certain revenue expenditure – generally, costs incurred in the day-to-day running of the R&D project, as opposed to money spent on capital assets. So you can't claim this relief on any capital expenditure for the R&D project, though it may be possible to claim for qualifying revenue expenditure capitalised as certain fixed or intangible assets. However, you may alternatively be able to claim relief for capital expenditure on R&D as a 100% capital allowance known as 'research and development allowance' (RDA).
Click here to download our flyer on R&D tax credits.
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.
