UK: Rates Of R&D Relief Continue To Increase In 2015 To Drive UK Innovation

Last Updated: 23 June 2015
Article by Stuart Lisle, James Tetley and Donna Milsom

The latest in a series of increases in the value of the R&D tax regime takes effect from 1 April 2015. Is your business making the most of this enhanced tax relief?

What is R&D?

Broadly, R&D is defined for these purposes as activities carried out that "seek an advance in science or technology, through the resolution of scientific or technological uncertainty".

The advance may be in the development of a product, or a process, and may include software developed internally.

It is a common misconception that only companies operating in certain sectors are eligible for this relief. We have worked with companies of all sectors and sizes to successfully claim the relief, including life sciences, manufacturing, marine, aerospace and defence, software – even the recruitment industry.

What has changed?

R&D tax relief has been available since 2000 but, during the course of this Government, the Treasury has invested significant resource in reviewing the relief, targeting it at the right companies and ensuring the UK remains an attractive location to develop and retain intellectual property.

In this current climate, where more scrutiny is being placed on tax planning, it is important that companies are aware that this is a relief actively intended to provide benefits to companies investing in research and development in the UK.

In the 2014 Autumn Statement, the Government announced:

  • Increases in the rate of relief for the SME scheme
  • Increases in the rate of relief for the RDEC (large company) scheme
  • Formalisation of existing understanding of consumable costs
  • The introduction of an advance assurance system for small companies making their first R&D claims under the SME scheme (the Government launched a consultation in January 2015 on the issues faced by smaller businesses when claiming R&D tax credits).

What is the benefit?

There are two regimes for R&D relief, the SME scheme and the large company scheme.

SME scheme

Under the SME scheme, the benefit is delivered as an enhanced deduction that reduces taxable profits/increases trading losses or, alternatively, a cash tax 'credit' can be claimed.

Qualifying expenditure incurred on or after 1 April 2012 will qualify for enhanced R&D tax relief at 225% (ie 125% beyond the original P&L deduction). Qualifying expenditure incurred on or after 1 April 2015 will qualify for enhanced tax relief 230%.

The value of the tax credit under the SME scheme is:

Date of claim Pre 1 April 2014 1 April 2014 - 1 April 2015 Post 1 April 2015
Credit rate 11% 14.5% 14.5%
Value of credit/Ł of R&D spend 24.75p 32.62p 33.35p

Companies can claim under the SME scheme provided the company or group has:

  • fewer than 500 employees, and either
  • turnover of less than €100m or
  • gross assets of less than €86m.

Large company scheme

For costs incurred after 1 April 2013, two schemes run in tandem – the legacy scheme and the new R&D expenditure credit (RDEC) scheme.

Under the legacy scheme, qualifying expenditure will benefit from R&D relief at 130% with no availability of a payable credit.

Under the new RDEC scheme, the benefit is now delivered above the line (ATL) in the body of the profit and loss account (ie before EBITDA) and is a taxable credit:

Period of claim 1 April 2013 to 1 April 2015 Post 1 April 2015
Taxable credit 10% 11%
Tax benefit 7.9% 8.8%

Large company scheme – to ATL or not to ATL?

With the two reliefs running in parallel until April 2016 (when the legacy relief ceases), companies face the decision of when to 'opt in' to the ATL regime. For most companies, the decision is simple:

  • The RDEC offers a higher rate of relief (7.9% vs 6.3%) based on a corporation tax rate of 21% and 8.8% after 1 April 2015 when corporation tax falls to 20%.
  • The RDEC will increase the company's EBITDA by 10% of qualifying expenditure (11% after 1 April 2015).
  • The RDEC offers a payable credit to loss making companies.

There are, of course, other factors to consider before opting for the ATL regime, but the opportunity is clear.

How to make a claim

When preparing and submitting a claim for R&D tax relief the key is to really look at what the company does. This will include engaging with other areas of the business, particularly technical staff, to ensure the claim is correctly scoped.

The next step is to design a methodology that avoids using significant internal resource to provide details of qualifying costs and activities.

The claim is made within a company's tax return, but we recommend that this is supported by a self-contained report that explains the nature of the work on which a claim is being made and addresses the questions that HMRC will typically ask.

Our experience of working with HMRC since the relief was introduced in 2000, and through representation on the consultative committees, means that we know what HMRC are expecting to see from a claim so we can minimise the risk of lengthy enquiries into your claim.

Where BDO make the difference

BDO's specialists have close relationships with the HMRC local specialist teams. The local R&D Inspectors are trained to actively support claims from companies undertaking R&D and our experience has been that HMRC have become increasingly knowledgeable about the relevant industries. With the focus of the guidance becoming increasingly complex, it is crucial to involve an R&D specialist at an early stage to ensure that the relief is maximised.

BDO can assist you in identifying qualifying R&D expenditure and help you maximise the benefit of a claim. Our pragmatic, commercial approach helps capture all the relevant information required without taking up excessive management time.

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.

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