Money For Nothing – Research and Development Tax Relief for Companies
Companies (small or medium enterprises) that engage in research and development (R&D) activities can claim enhanced expenditure against their corporation tax where the R&D project or projects qualify for R&D tax relief.
Complex rules apply in determining whether qualifying R&D has taken place, however a successful claim can bring material tax savings along with a cash injection into the company (where there is a loss). Furthermore, for ongoing R&D projects, claims may be made year on year.
Note – large companies may also obtain relief for R&D under the RDEC scheme, however the focus of this article is on the rules applying to small and medium enterprises (SMEs). Rates are based on the 2020/21 UK tax year.
What is R&D?
R&D takes place where a project seeks to achieve an advancement in science or technology, and this will involve activities that seek to resolve technological or scientific uncertainties. The definition is broad so as to capture a wide range of activities, but for example, relevant activities may involve seeking the creation or improvement of new processes, or new knowledge leading to cost improvements.
It is not necessary that a technological or scientific advancement is achieved, provided that the activities seek to realise an advancement. Furthermore, a project as a whole may not qualify as R&D but may contain elements of R&D, and relevant costs in relation to the qualifying elements may be able to obtain relief.
What qualifies as R&D will differ from industry to industry, and so professional advice is advised.
What Costs Can I Claim?
To qualify for relief, expenses must, amongst other conditions, be revenue in nature and be incurred directly on R&D.
Costs that can be claimed include:
- Staff costs (including salary/wages, employers NI, employers pension contributions and some expenses)
- 65% of the cost of subcontracted R&D
- 65% of the cost of externally provided workers e.g. agency staff, contractors
- Consumables (including materials, water, fuel, utilities)
- Payments to subjects for clinical trials.
What is the Benefit?
Any relevant expenditure that qualifies under the R&D rules will obtain enhanced relief for corporation tax at 230%. In effect, for every £1 of relevant R&D expenditure, the company may deduct £2.30 in calculating it’s corporation tax liability, reducing the corporation tax payable to HMRC.
Where there is a loss, the company may claim the surrenderable loss as a repayable tax credit at a rate of 14.5%. This tax credit will be paid to the company from HMRC.
Where, as a part of the company’s trade, costs are incurred on achieving technological or scientific uncertainty and advancement in the overall field, then R&D tax relief may be available. However in order to make a claim, specific conditions must be met by the company and relevant R&D the project(s). Professional advice should therefore be obtained when seeking to make a claim.
Our team has experience and expertise in identifying relevant R&D projects, and can assist with making a claim for R&D tax relief. If you believe your company may be engaged in qualifying R&D activities, and you want to get money back for your company, please contact a member of the team for a no obligation chat.