UNDERSTANDING THE POTENTIAL BENEFITS
Many companies in the financial sector are still not claiming this hugely valuable tax relief, or taking its full benefit. This is often because they do not realise they are carrying out research and development (R&D), due to the complexity of the rules.
SMEs in the financial sector, including insurance made only 145 claims in 2012/13 (1.1% of the 13,000 claims), but had the third highest average claim of all sectors at £69,000, a substantial sum. We have made numerous claims for the relief for financial companies, in particular for software costs on innovative IT projects.
We thought it was worth reminding companies what R&D is all about.
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 an SME is taxpaying, the extra relief can be worth up to almost 30% of cost, depending on the year the expenditure is incurred. This arises from an 'uplift' in deductible costs of 125%, proposed to increase to 130% from 1 April 2015.
Where an SME is lossmaking, the relief can give rise to cash repayments of over 32.5% of the cost, even where no tax has ever been paid. This is of considerable assistance to a start-up.
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 a:
- turnover not exceeding €100m; or
- balance sheet total not exceeding €86m.
The definitions of linked or partner enterprises include, for example, companies owning 25% of the company or being 25% owned by the company.
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.
In the case of agency costs, or subcontracted R&D, only 65% of the cost qualifies for this uplift unless certain elections are made.
Expenditure capitalised in the accounts is not necessarily excluded. If capitalised into tangible fixed assets, it might only qualify on a depreciated basis, if at all.
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.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter 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: 15/088 exp:31/7/15
