UK: R&D Tax Credits

Companies undertaking creative or innovative work in the fields of science and technology may be eligible to claim significant additional tax relief. This can result in lower tax payments or a cash receipt from HMRC even where no tax has been paid.

Despite being on the statute books for over a decade, there are still companies not claiming this hugely valuable tax relief, or not taking its full benefit. This is often because they do not realise they are carrying out research and development (R&D), as their accountants or finance directors see only 'wages and salaries' in the accounts, or they do not fully understand the complex rules.

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 will include 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 we offer

At Smith & Williamson, 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 www.smith.williamson.uk
  • ensure cash is received promptly from HMRC
  • deal with HMRC correspondence and enquiries regarding a claim.

What is it worth?

Where a small or medium sized enterprise (SME) is taxpaying, the extra relief can be worth up to almost 30% of cost. This arises from an 'uplift' in deductible costs of 125% from 1 April 2012, and a marginal rate of corporation tax (for the year ended 31 March 2014) of 23.75% on profits between £300,000 and £1,500,000 for a single company (these limits are reduced for associated companies).

Alternatively, where an SME is lossmaking, the relief can give rise to tax repayments of as much as 25% of the cost, even where no corporation tax has ever been paid. This is of considerable assistance to the start up in need of cash to fund the R&D.

For large companies the uplift under the enhanced deduction scheme is 30%, so that with a rate of corporation tax of 23%, the extra relief can be worth almost 7% of cost – not so high as for SME relief but still attractive and usually on much bigger costs. From 1 April 2013 there is an alternative for large company relief in the form of an 'R&D expenditure credit'. This is optional (by irrevocable election) until March 2016 after which it will become mandatory. The R&D expenditure credit regime gives a similar, though marginally higher benefit (7.7% with a corporation tax rate of 23%) to the enhanced regime by giving an expenditure credit of 10%. In certain circumstances this expenditure credit can be surrendered for a repayment for a large company making a loss (repayment of the relief is not possible under the enhanced regime).

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 R&D tax credits An incentive to innovate 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 that each case must be looked at on its own merits.

SMEs

To qualify for the reliefs for SMEs, 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.

Qualifying expenditure

Qualifying R&D expenditure must be 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.

For periods ending on or after 1 April 2012, the £10,000 minimum expenditure requirement previously applying before R&D relief would be given, has been removed, so that there is now no minimum the company must have spent on qualifying R&D in the accounting period.

The relief

R&D tax credit relief is given to SMEs by increasing the deduction for qualifying research and development expenditure from a 100% deduction to a 225% deduction (a 125% uplift), incurred on or after 1 April 2012.

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

R&D tax repayment credits – SMEs

Where an SME has a trading loss for tax purposes after taking the uplift into account, it may claim an R&D tax repayment credit in return for 'surrendering' this loss. This surrenderable loss is the lower of:

  • the trading loss adjusted for tax purposes, or
  • the qualifying R&D expenditure as increased by the uplift.

The R&D repayment tax credit is then 11% of the surrenderable loss. A restriction by reference to PAYE and national insurance contributions is removed for claims relating to accounting periods ending on or after 1 April 2012.

The combination of the 11% rate with the 125% uplift, or later equivalents, gives an effective refund of 25% of the qualifying R&D expenditure where that expense is exceeded by trading losses for the year.

Where the repayable R&D tax credit is claimed, the trading loss carried forward is correspondingly reduced. The R&D tax credit will be paid to the company by HMRC, or may be set against any corporation tax or PAYE liabilities due.

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. They also have special R&D units who consider claims carefully, so it pays to prepare and present them carefully.

How we can help

Many companies miss out on claiming R&D relief because they do not fully identify those activities or costs which qualify for the relief. If you would like to find out whether and to what extent your company and activities are eligible, or you want to reassess your current claims process, get in touch with a member of our team.

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 2013.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Paul Duckworth
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
Smith & Williamson
Smith & Williamson
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
Smith & Williamson
Smith & Williamson
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions