Research & Development (“R&D”) Relief is a relief which may reduce your Corporation Tax liability. The Relief can only be claimed if your company is liable for Corporation Tax. Since its UK launch in 2000 until 2012-13 there have been 100,000 claims made for R&D Relief with a claim value of £9.5 billion and is increasing yearly. The majority of those claims came through the Small or Medium Enterprise (“SME”) Scheme.
Many businesses are spending money on R&D and not realising that they can benefit from the Relief. If you are a SME then you may be able to ask HMRC to give you a tax credit instead which will be paid as a cash sum.
Understandably, the Government wants to encourage an increase in R&D because of the benefits of having a knowledge-based economy. The majority of the claims submitted to HMRC for R&D Relief are for development rather than research.
What R&D is eligible for the Relief?
Your business can only claim R&D Relief where a particular project represents an advance in science or technology and the project is related your business’ trade, even if the trade is one that you intend to start based on the outcome of the R&D you are doing.
How to claim R&D Relief
There are two schemes available for claiming the R&D Relief; which one you use depends on the size of your business. There is the SME Scheme and the Large Company Scheme.
More companies than you may think are considered SMEs for the purposes of this Relief. A SME is a business which has less than 500 employees and an annual turnover of not more than €100 million or gross assets of more than €86 million. This SME definition applies for expenditure on R&D since 1 August 2008. Prior to this date the definition of a SME was narrower.
If you are a subcontractor you cannot claim R&D Relief under the SME Scheme but, fear not, you may be able to claim the Relief under the Large Company Scheme.
If your company is not a SME then you can only claim under the Large Company Scheme unlike SMEs which may, in certain circumstances, be able to claim through both schemes.
What is qualifying R&D expenditure?
Where the business and the project meet the necessary requirement to claim the Relief, then the Relief can be claimed on qualifying expenditure. These are costs associated with the R&D activity of the business and can either be expensed costs or intangible fixed assets. Examples would include: software used by the R&D staff; energy and materials consumed; subcontracted R&D costs; independent research (Large Company Scheme); externally provided workers; payments to volunteers; utility costs; and staffing costs (to the extent they were engaged to work on the R&D activities).
What are the benefits of the Relief?
The Relief is taken as an additional deduction for Corporation Tax purposes by reducing your profit or increasing you loss which can be offset against future profits.
SME Scheme
If you are a SME and using the SME Scheme to claim R&D Relief then the rate of the Relief is higher. The tax relief on qualifying R&D expenditure, from 1 April 2012, is 225%.
If you have allowable trading losses then the loss can be increased by 125% of the qualifying R&D costs and you can choose to have your R&D Relief paid as a tax credit.
You can only claim R&D Relief as a SME company if your company is a going concern when it made the claim i.e. it wasn’t in administration or liquidation. If your company ceases to be a going concern between making the claim and receiving the credit then HMRC will not pay the credit.
Large Company Scheme
From 1 April 2008, the rate of the relief is 130% on qualifying R&D. If there is an allowable trading loss then the loss can be increased by 30% of the qualifying R&D costs.
Ready to make use of possible R&D Relief?
You will see from the figures above that this Relief is certainly worth claiming if you are able to but with various conditions to satisfy it would be prudent to seek professional advice to ensure that you are maximising your entitlement.