8 aspects of R&D tax relief that could make your project costs tax deductible

R&D tax relief has been available since the year 2000, with hundreds of thousands of successful claims made since then by UK companies across all kinds of business sectors – from software development, engineering design, construction, bio-energy, cleantech, agri-food to the life and health sciences.

When people think about R&D they tend to have a very fixed idea of what it means, but the way R&D is defined for the purpose of R&D tax relief is quite different from the standard definition. HMRC defines the qualification criteria as follows: “The company must be carrying out research and development work in the field of science or technology. The relief is not just for ‘white coat’ scientific research but also for ‘brown coat’ development work in design and engineering that involves overcoming difficult technological problems. This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way. But pure product development in itself does not qualify.”

Apart from claiming for reimbursed employee expenses which was recently clarified as being allowable (and back-datable), here are 8 things you may have overlooked about R&D tax relief in the past. They could mean you are eligible to make a claim in the future:

1. SMEs can claim for the enhanced rate of tax relief, which is currently 130%. This means that for all allowable costs invested into qualifying R&D activities, they can claim 230% in tax relief. For the purpose of R&D claims, an SME is a UK registered company with less than 500 employees and either up to €100 million in annual turnover or €86 million in balance sheet assets. When establishing whether a company is an SME, it is necessary to take into account both linked enterprises (enterprises which control the claimant company) and partner enterprises (those under the 25% ownership of another enterprise);
2. The Research & Development Expenditure Credit (RDEC) scheme is available for companies which, although qualifying SMEs don’t qualify under the SME scheme because, for example, they act as a subcontractor. In this instance, an SME might claim relief under the SME scheme for certain project expenditure, and relief under RDEC for other project expenditure;
3. Large companies can also claim using the RDEC scheme instead of the SME enhanced R&D tax credits scheme. The RDEC rate is equal to 11% of qualifying expenditure and will generally be set against the company’s corporation tax liabilities;
4. The cost of using subcontractors to carry out R&D activity on behalf of a company may qualify for tax relief under the SME scheme, but only a proportion of the expenditure can be claimed. The amount available for relief depends on the circumstances, up to a maximum of 65% of costs incurred;
5. If a company has invested in new plant and machinery to conduct R&D activities it may be possible to claim for 100% of R&D capital allowances on capital expenditure incurred – again this will depend on the circumstances;
6. Companies that are eligible for R&D tax credits under the enhanced scheme (i.e. SMEs) and that have never made a claim in the past, can now get advance assurance from HMRC that a future claim will qualify. This applies provided that the company’s tax payments are up to date and they have never been involved with tax avoidance schemes requiring a disclosure;
7. It is possible to obtain R&D tax credits for a project in which two separate companies collaborate, with each entity submitting a separate claim for qualifying costs they have incurred. If the collaboration involves another organisational entity, for example a university, only the company chargeable to corporation tax is entitled to claim;
8. If a company has received a grant or a subsidy which was used to finance the R&D activity, it may still be possible to make a claim for R&D tax credits but the claim would typically be split between the RDEC and SME schemes. The expenditure incurred using the grant may be covered by the RDEC and the remainder could qualify for the enhanced SME rate.

Worked example: How R&D tax credits works in practice:

SME company Pathfinders Ltd made a profit of £30,000 in the financial year ended 31 March 2017 which was chargeable to corporation tax. During the year, Pathfinders had invested £70,000 in R&D activities that qualified for R&D tax relief at the enhanced rate of 130%. Costs of £70,000 will already have been included as a deduction in the company’s profit and loss account, and a further amount of £91,000 can be deducted as R&D tax relief.  The effect of the R&D claim is that the company’s taxable profits of £30,000 become a tax loss of £61,000.

In addition to reducing its corporation tax liability to nil, the company can utilise this loss in 3 alternative ways:

1. Carry it back to offset against profits made in the previous accounting year and claim a repayment of corporation tax already paid. If the company had sufficient profits in the previous year, and paid corporation tax at the rate of 20%, this would result in a refund of £12,200;
2. Claim a payable credit of 14.5% in exchange for the loss, thereby obtaining a refund of £8,845; or
3. Carry the loss forward to offset against profits of future years at the corporation tax rate applying for that year (the rate is currently 19% which would mean a future value of £11.590.)

If you would like to discuss making a claim for R&D tax credits, RJP offers a no win no fee service for companies. We have many years of experience making successful claims and would be pleased to assist. To find out whether your project is likely to qualify, take our 2-minute R&D tax relief test.

For more information email partners@rjp.co.uk