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 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
- 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 31% of cost. This arises from an 'uplift' in deductible costs of 125% from 1 April 2012, and a marginal rate of corporation tax of 25% 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 is 30%, so that with a main rate of corporation tax of 24%, the extra relief can be worth 7.2% of cost - not so high as for SME relief, but still attractive and usually on much bigger costs. And while there is no current opportunity for larger companies to convert losses into repayments unless corporation tax has been paid, an 'above the line' credit is proposed for Finance Bill 2013 such that a repayment will become a possibility from 1 April 2013.
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 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
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.
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.
