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 yet minimising exposure to penalties.
  • help to ensure cash is received promptly from HMRC
  • deal with HMRC correspondence and enquiries regarding a claim.

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?

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 cash repayments of over 32.5% (proposed from 1 April 2014) 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 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.

Large companies and subcontracted or subsidised 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 in the form of an 'expenditure credit'. This is optional (by irrevocable election) until March 2016 after which it will become mandatory. This regime gives a similar, though marginally higher benefit (7.9% with a corporation tax rate of 21%) to the enhanced regime by giving a taxable expenditure credit of 10%.

For a large company making a loss, this expenditure credit can be surrendered for a cash payment (which is not possible under the enhanced regime).

Where large companies subcontract R&D to SMEs, it is the SME which can claim the relief, but only under the enhanced or expenditure credit scheme for large companies. This also applies to subsidised R&D not qualifying under the SME scheme.

For further details on R&D carried out by or for large companies, see our briefing note: www.smith.williamson.co.uk/uploads/ publications/257-briefing-note.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. If only partly funded and not with EU state aid, the unfunded part may so qualify.

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. 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.

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 2014. code 14/543 exp: 05/04/2015 www.smith.williamson.co.uk