Recent statistics have shown that the number of companies claiming research and development (R&D) tax credits increased by 19% in the 2015/16 tax year, with the total amount of R&D claimed rising to almost £2.9 billion. While this is good news for many businesses, it is thought that thousands more may still be missing out on this potentially valuable tax break.
The government has increased the value of tax relief available under the R&D scheme over recent years, in an effort to encourage economic growth.
The incentives are only available to companies, and there are different types of relief, depending on the size of the company. Here we focus on the relief available for small and medium-sized enterprises (SMEs).
R&D: what are the benefits for SMEs?
SMEs can claim SME R&D relief if they have fewer than 500 members of staff and a turnover of under €100 million, or a balance sheet total under €86 million.
The relief allows companies to deduct an extra 130% of qualifying costs from their yearly profit. This amount is in addition to the normal 100% deduction, giving a total deduction of 230%. R&D enhanced relief represents an additional corporation tax reduction of 26% of the expenditure incurred.
If the R&D claim creates a tax loss, then the company may be able to surrender the loss for a cash repayment. This is 14.5% for expenditure incurred on or after April 2014. A surrendered loss could therefore give a repayment of up to 33.35% of the expenditure.
In order to claim the relief, the company must have incurred expenditure on qualifying R&D projects that are relevant to the company’s trade. A project should address an area of scientific or technological uncertainty, and be innovative. The innovation needs to be an improvement in the overall knowledge in the relevant field of research, not just an advancement for the company.
Types of expenditure
Qualifying expenditure which is incurred on activities which are either directly or indirectly related to the R&D project fall into different categories. These are as follows:
- staffing costs
- expenditure on consumable or transformable materials
- costs of work done by subcontractors and externally provided workers
- costs of clinical trial volunteers.
To be eligible, expenditure must be revenue in nature and paid by the time that the R&D claim is accepted. This means any accruals for expenditure have to be monitored carefully after the year end to make sure that they are paid and not written back to profit.
Research and Development Expenditure Credit (RDEC) scheme
RDEC can be claimed by SMEs that have received a grant or subsidy for their R&D project. It can also be claimed by SMEs who have been subcontracted to do R&D work by a large company. The RDEC scheme allows SMEs to claim a taxable credit of 12% of eligible expenditure incurred on or after 1 January 2018 (up from 11% in 2017). The credit received is used to settle corporation tax liabilities of the current, future or prior periods, subject to certain limitations and calculations. Where there is no corporation tax due, the amount can be used to settle other tax debts or can be repaid net of tax.
If you would like further information or advice on claiming R&D relief, please do contact us.