Insights

When it was originally launched, Research and Development (R&D) Tax Relief received a lukewarm reception for being inaccessible to a large majority of companies and organisations. Since then, the rates of the relief have increased considerably and the qualifying criteria have relaxed. Professionals have started to specialise in the qualifying criteria and a series of successful claims for a very wide range of qualifying R&D projects have proved that actually, this is very useful form of company tax relief.

Typically, companies making claims can expect to receive tax relief of around £60,000 and for some companies, it means not having to pay any corporation tax for many years. So why aren’t more companies and organisations considering whether they might be able to benefit? Lesley Stalker, tax partner at RJP and expert in R&D Tax Relief outlines the basics in order to evaluate whether a claim might be successful.

What are the qualifying criteria for companies?

Firstly, only an incorporated company can claim R&D Relief because it is linked to the payment of corporation tax. The company must also be a going concern; this means it must be able to continue operating and conducting its R&D projects whether it receives the tax relief or not.

The Government allows small to medium sized businesses who qualify for R&D tax relief to either reduce their corporation tax bills by claiming the relief or receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs (HMRC). The definition of a small to medium sized business in the case of R&D tax credits specifically, is a company or organisation with fewer than 500 employees and either an annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million.

How much tax relief can you claim?

It’s now possible to claim 225% of all allowable R&D costs for projects where at least £10,000 was invested in a qualifying activity. For instance, for every £100 of costs incurred, the Government allows qualifying companies to reduce their taxable profits by £125  in addition to claiming for the £100 already paid as tax deductable expenses. Alternatively, a company can elect to receive a credit for the additional £125.

R&D tax credit applications can be backdated by up to two years, and for each previous year for which relief is claimed the tax relief amounts available may differ. In 2011 the allowable deduction was 200%, and prior to 2011 the deduction was slightly lower. Starting from April 2012, following the increase in the deduction to 225%, the Government has imposed a maximum amount of €7.5million which can be claimed for a single project.

What types of projects will qualify for R&D tax relief?

R&D Tax Relief is only available for companies embarking on trade related projects that will achieve ‘an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’. This is different to just advancing an existing state of knowledge or capability.  And the condition of ‘trade related’ is important because the project must fall within the confines of the company’s existing trade, or be in a new trade it intends to diversify into, subject to the results of the R&D activity.

What is HMRC looking for in an application for R&D Tax Relief?

1. Evidence of real scientific or technological advance

They will want to understand what scientific or technological advance is being sought and what the overall aims of the project are. A successful application must go beyond simply being commercially innovative and cannot include the development of products or services that are non-scientific or non-technological. For this reason, economic advances are not allowable.

2. Evidence that real scientific or technological uncertainties exist which the project seeks to resolve.

The determining factor here is that prior to embarking upon the project, there was very little knowledge available from other professionals working in the same field to indicate whether the project is scientifically possible or technologically feasible and how it can be achieved.

3. Evidence proving how and when the uncertainties were overcome and why this knowledge was not readily available already.

It is important to explain how the company or organisation intends to overcome the uncertainties and the investigations and analysis undertaken, to clearly demonstrate this was a complex matter. It is also important to include details of the individuals working on the project to demonstrate their professional competence in the area being researched and their suitability for the role.

Which costs qualify for R&D Relief?

To qualify for tax relief, the activity must either contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity. If your claim is successful, it is possible to obtain tax relief or credits for the daily running costs incurred. This is a complex area because different rules apply according to whether you are using employees or sub contractors to complete the project, and if the latter, lower rates of tax relief apply.

The costs claimed must be apportioned in relation to how much of a ‘resource’ was used wholly and exclusively for the project. For example, for an employee spending 70% of his or her time on the project, 70% of their cost can be claimed, with the remaining 30% not being eligible for the additional relief.

In summary the following costs are usually allowable:

-  Cost of specialist employees or sub contractors (special rules apply for the latter and tax relief at 65% of costs only can be claimed)

-  Purchase of certain specialised assets for use during the project (subject to certain rules)

-  Purchase of raw materials and consumables utilised during the course of the project

-  Cost of utilities, e.g. power, fuel, water, used during the project but not telecommunications or data costs.

Interested in the possibility of obtaining R&D Tax Relief?

RJP has a significant amount of experience making successful R&D Tax Relief claims, with the average amount being in the region of £100,000.

If you would like to discuss whether a project you are embarking upon would qualify for R&D Tax Relief, please contact Lesley Stalker by emailing las@rjp.co.uk.