There is a very high chance that your business is missing out on an incredibly valuable tax relief, which could provide you with a cash refund or significantly reduce your tax costs. Research and development (R&D) by UK companies is being actively encouraged by Government through a range of tax incentives. The incentives are only available to companies and include:
- Increased deduction for R&D revenue spending
- A repayable R&D tax credit for companies not in profit.
The relief
The R&D revenue relief increases the amount a company can obtain tax relief on to more than the normal 100% revenue deduction. This relief is 230% for expenditure incurred by a SME on or after 1 April 2012 (230% from 1 April 2015). Large companies are subject to a different regime not considered here.
Alternatively, an SME may claim a payable R&D tax credit for an accounting period in which it has a surrender-able loss. For expenditure incurred on or after 1 April 2014 the amount of payable tax credit that a company is entitled to for an accounting period is 14.5% of the surrender-able loss for that period. For accounting periods ending on or after 1 April 2012 the R&D credit is no longer restricted to the PAYE/NIC liabilities of the company. Example
The following is an example of the relief in operation.
Neuf Ltd is an SME and incurs qualifying R&D expenditure during the year to 31 March 2020 of £100,000.
Assuming Neuf Ltd is profitable it will be able to claim a deduction in respect of its R&D expenditure of £225,000. This will reduce its corporation tax liability by £42,750 (assuming a 19% rate), giving the company effective relief on the actual expenditure of 43%.
If, on the other hand, Neuf Ltd is making losses, the £225,000 attributable to the R&D expenditure can either be carried forward for relief against future trading profits or converted into a payable R&D tax credit. The rate of conversion is currently set at 14.5% so this would generate a payment to the company of £32,625 (£225,000 x 14.5%) which equates to 32.63% of the original expenditure.
Considerations
There are two main considerations to establish whether the reliefs for R&D are available. These are concerned with the activity and also the conditions relating to the expenditure incurred.
Is the activity qualifying R&D?
The first essential matter to determine is whether HMRC would accept that the particular activities constitute R&D.
Relief is available if a 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.
Furthermore it must be related 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.
https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief
HMRC guidance suggests when making the claim for relief that a company should answer the following questions, so they can see how your view of the definition applies to your project.
- What is the scientific or technological advance?
- What were the scientific or technological uncertainties involved in the project?
- How and when were the uncertainties actually overcome
- Why was the knowledge being sought not readily deducible by a competent professional?
Please do get in touch if you would like advice on R&D so we can maximise the reliefs available.
Does the expenditure qualify?
The second consideration is to ensure the relevant tax conditions are met, the most important being:
- The expenditure must be from a qualifying revenue category and not be capital expenditure
- The spending must not be incurred in carrying out activities contracted to the company by another person (however a slightly different form of R&D tax credit may apply - you may still be able to claim, as a subcontractor, under the Large Company Scheme which is not considered further in this factsheet.
- The expenditure must not have been met by another person (if the R&D project is funded in whole or part by ‘State Aid’ such as a government grant, none of the spending on that project can qualify for R&D tax credits).
The R&D does not have to be undertaken in the UK
You must make a claim for R&D relief in your Company Tax Return. The normal time limit for making a claim is two years after the end of the relevant Corporation Tax accounting period.
Recent changes
From 1st April 2021 further changes were made to the R&D tax credit regime for SMEs.
These changes have been designed to reduce fraud and abuse and will take the form of a ‘cap’ on the value of the tax credit which can be claimed. The cap will apply to accounting periods which begin before, and end on or after, 1st April 2021. Where an accounting period spans the 1st April 2021 then claims will need to be split between to the pre-cap and post-cap rules.
Changes
- Under the new rules, the amount of payable R&D tax credit an SME can claim is limited to £20,000 plus 300% of its total PAYE and National Insurance contributions (NICs) liability for the period.
- Companies claiming below £20,000 will be unaffected, this is to ensure small businesses who truly need funding do not face the restrictions.
- When calculating the cap, businesses will be able to include related party PAYE & NIC liabilities attributable to the R&D project.
- There is a provision to prevent any PAYE or NIC liabilities counting towards more than one company’s cap, which is classed as ‘double counting’.
- A company is exempt from the cap if it meets these two key tests;
- The company’s employees are creating, preparing to create or managing intellectual property (IP).
- Less than 15 % of its R&D qualifying expenditure is spent with connected persons.
- These tests are designed to exempt those with low PAYE and NIC, but are nevertheless engaged in genuine and substantial R&D.
Example
R&D Limited has a tax adjusted loss, before any claim for R&D tax credits, for the year ended 31 March of £100,000. In the year, their qualifying R&D expenditure is £100,000 (Uplifted to £130,000 for tax adjustment purposes). They do not meet the criteria of the cap exemption tests.
- Prior to 1st April 2021, the tax credit they could claim would have been £100,000 + £130,000 = £230,000 x 14.5% = £33,350
- After 1st April 2021, we need to take account of the total PAYE & NI liability for the claim period.
For this example, the total PAYE & NI liability for the period’s £4,000. This would mean the maximum tax credit claimable would be £20,000 + (£4,000 x 300%) = £32,000
How we can help
So to find out how HMRC can help your business with some valuable cash and if this is something that you would like to discuss in more detail, please contact us.
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