The United Kingdom's Research and Development Tax Credit (R&D Tax Credit) is a UK tax incentive designed to encourage small and medium sized businesses (SME) to invest in R&D. The Research and Development Expenditure Credit (RDEC), introduced in 2013, is a UK tax incentive designed to encourage large companies to invest in R&D in the UK. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditures.
R&D Tax Credit for SME's
A small or medium sized enterprise (SME) is a company with less than 500 employees with either:
- an annual turnover under €100 million
- a balance sheet under €86 million
Your company isn’t an SME if it’s part of a larger enterprise that, when taken as a whole, would fail these tests. When considering these limits, you should also include any linked, partnership or shareholding companies that have at least a 25% share in your company and/or any company that your company holds a 25% share in.
Rate of Tax Relief for SME's
As of 1 April 2015 the tax relief on allowable R&D costs is 230%. This means that for every £100 of qualifying costs, your company could reduce your corporate tax (CT) by an additional £130 on top of the £100 spent.
Example tax relief for expenditure of £20,000 where the company has made a profit of £26,000
|
R&D expenditure |
£20,000 |
|
R&D Relief |
£20,000 × 130% = £26,000 |
|
Normal taxable profit |
£26,000 |
|
Taxable profit less R&D Relief |
£26,000 - £26,000 = 0 |
|
Revised taxable profit |
0 |
|
Calculation step |
Amount |
|
R&D expenditure |
£20,000 |
Example tax relief for expenditure of £20,000 where the company has made a loss of £10,000
|
R&D expenditure |
£20,000 |
|
R&D enhancement |
£20,000 × 130% = £26,000 |
|
Normal trading loss |
£10,000 |
|
Trading loss less enhanced by R&D tax relief |
£10,000 + £26,000 = £36,000 |
|
Loss available to carry forward or back for Corporation Tax purposes |
£36,000 |
R&D Tax Credits for SME's
If your company incurs a loss, you can choose to receive R&D tax credits instead of carrying forward a loss. It’s a cash sum paid to you by HMRC - if your company has PAYE and National Insurance contributions liabilities for the same period.
The amount of tax credit you can receive is limited to the total of PAYE and National Insurance contribution liabilities, but it does include liabilities for all directly employed staff - not just those working on the R&D project.
Example - converting R&D tax relief on expenditure of £20,000 to a tax credit payment for accounting period commencing 1 April 2015 and ending 31 March 2016
|
R&D expenditure |
£20,000 |
|
R&D enhancement |
£20,000 × 130% = £26,000 |
|
Normal taxable profit |
£6,000 |
|
Trading loss (after R&D tax relief) |
£20,000 |
|
R&D expenditure qualifying for conversion to credits |
£20,000 |
|
Potential tax credit |
£20,000 × 14.5% = £2900 |
|
Payable tax credit |
£2,900 |
|
Losses available to carry forward or back |
Nil |
What R&D Projects Qualify?
Your company can only claim for R&D tax relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty - and not simply an advance in its own state of knowledge or capability.
The project must relate to your company’s trade - either an existing one, or one that you intend to start up based on the results of the R&D. If your company or organisation is claiming tax relief under the SME scheme it must own any intellectual property that might arise from the project.
Scientific or technological advance
Consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance. This is important in judging whether or not R&D for tax relief purposes is being undertaken. Science doesn’t include work in the arts, humanities and social sciences (including economics). It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
Scientific or technological uncertainties involved in the project
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, isn’t readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems aren’t likely to be technological uncertainties.
Set out at a high level, in a way that can be understood by someone who’s not an expert, what the uncertainties were and when they started and ended.
How and when the uncertainties were actually overcome
Describe the methods taken to overcome the uncertainties and the investigations and analysis undertaken. This shouldn’t be in great detail, but enough to show it wasn’t straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties weren’t overcome, explain what happened.
Why the knowledge being sought was not readily deducible by a competent professional
It might be publicly known that others have tried to resolve the uncertainties and failed. Or maybe others have resolved the uncertainties, but precisely how it was done isn’t in the public domain. In either case a valid technological uncertainty can still exist.
Or there’s little public information available about the project, you’ll need to show that the people leading it are competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate, set out the details and have evidence available if needed.
What Costs Qualify for R&D Tax Relief?
To qualify as R&D, any activity must meet the definitions set out by the Department for Business, Innovation and Skills. These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.
If your company and the project both meet the necessary conditions, you can claim tax relief on revenue expenditure in the areas outlined. This means the day to day running costs of the business, not capital expenditure on assets.
If you’ve spent money, for example, on staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.
Employee costs
This relates to employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company . They shouldn’t be consultants, agency workers, or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors.
Staff providers
Paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D. The staff provider needs to contract with the individual whose services they supply – not through another person.
Materials
Consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs.
Payments to clinical trials volunteers
The cost of relevant payments to subjects of clinical trials.
Utilities
Power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
Software
Computer software used directly in the R&D.
Subcontracted R&D expenditure
If your company or organisation is claiming tax relief under the SME Scheme then you may be able to claim back 65% of what you spend on certain R&D activities carried out for you by a subcontractor. But if the subcontractor is connected to your company, or you have jointly elected for connected parties treatment, special rules apply.
If your company isn’t an SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.
Capital expenditure
Although R&D tax relief is only available for ‘revenue expenditure’ - generally day-to-day running costs, rather than capital expenditure - if you’re involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
How and when to Claim R&D Tax Relief
You must make any claim for R&D tax relief in your CT return or amended return. The normal time limit for making your claim is 2 years after the end of the relevant CT accounting period.
You claim for R&D tax relief by putting an X in either box 99 (SME) or box 100 (large companies) of your CT return, and in both cases, put the enhanced expenditure in box 101 - that is, the actual amount spent multiplied by 230% or 130% as appropriate. You should also include this enhanced figure in your calculations of the profit (box 3) or loss (box 122) for the period.
If your company or organisation is a SME and you want to convert some or all of the tax relief into payable tax credits you’ll also need to put the amount payable to you in box 87, box 89 and box 143 - and put an X in the ‘repayment due for this return period’ box on page 1.
Although it’s not a legal requirement, HMRC encourages companies to:
- tell them why the company or organisation considers its project(s) to be allowable as R&D
- provide a summary of the costs incurred on the R&D and how the figures in the return were arrived at
Record Keeping
There’s no specific record keeping requirement for R&D tax relief claims. But the general CT requirement to keep sufficient records to support the entries on your CT return still applies.
HMRC doesn’t expect you to create new primary business records just for an R&D tax relief claim. But you may need to maintain your business records in a different way, so you can access the information you need easily.
Before you make your claim, you may want to involve your R&D staff in the process. This will help you identify qualifying activities and expenditure.
HMRC may ask to see your company or organisation’s records when they make a compliance check into your CT return or R&D tax relief claim made separately from a return.