Research and Development (R&D) Relief for Corporation Tax
Research and Development (R&D) Relief is a Corporation Tax relief that may reduce your company or organisation's tax bill by more than your actual expenditure on allowable R&D costs.
Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs (HMRC) but your company or organisation can only claim R&D Relief if it is liable for Corporation Tax.
B2B Cashflow Solutions can help you identify the opportunities and arrange the help you need throughout the process
There are two schemes for claiming relief, depending on the size of the company or organisation:
- The Small or Medium-sized Enterprise (SME) Scheme
- The Large Company Scheme
The Small and Medium-sized Enterprise Scheme
A SME is a company or organisation with fewer than 500 employees and either of the following:
- an annual turnover not exceeding €100 million
- a balance sheet not exceeding €86 million
This definition applies to spending on R&D from 1 August 2008. Before that date, a SME was a company with fewer than 250 employees, and either of the following:
- an annual turnover not exceeding €50 million
- a balance sheet not exceeding €43 million
This scheme has higher rates of relief. From 1 August 2008, the tax relief on allowable R&D costs is 175 per cent
This means that for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £75 on top of the £100 spent. It also includes a payable credit in some circumstances.
You can only claim under the scheme for SMEs if your company or organisation meets the definition of a SME for R&D Relief purposes (see the section above for a definition).
In certain specific situations, even if your company or organisation meets the definition of a SME, you may not be able to claim relief under the SME Scheme. You may however be able to claim under the Large Company Scheme.
This means that, if your company is small or medium-sized, you may be able to claim R&D Relief under the SME Scheme for one project and the Large Company Scheme for another.
If your company makes a loss, you can choose to receive your tax relief by way of tax credits - a cash sum paid to you by HMRC - if your company or organisation has PAYE and National Insurance contributions (NIC) liabilities for that period. The amount of tax credit you can receive is limited to the total of PAYE and NIC liabilities for that period. But it includes liabilities for all directly employed staff - not simply those working on the R&D project.
If your company is small or medium-sized, then you can only get paid tax credit if your company is a going concern, and its latest published accounts were prepared on a going concern basis, and nothing in the accounts suggests that its status (as a going concern) depends on it receiving R&D Relief or tax credits.
The Large Company Scheme
If your company is not small or medium-sized, then you can only claim under the Large Company Scheme.
See the section in this guide on R&D Relief schemes to find out whether your company or organisation meets the definition of a SME.
Amount of expenditure
Tax relief is only available if you spend at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. There is no upper limit.
Rate of tax relief
From 1 April 2008, the tax relief on allowable R&D costs is 130 per cent - that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £30 on top of the £100 spent.
If instead there is an allowable trading loss for the period, this can be increased by 30 per cent of the qualifying R&D costs - £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
Subcontractors
You can't claim R&D Relief under the SME Scheme if you are a subcontractor - that is, if you have been subcontracted to do the work on behalf of somebody else.
Even if your company is small or medium-sized, you may still be able to claim, as a subcontractor, under the Large Company Scheme. Contact B2B Cashflow Solutions to find out when you may be able to claim R&D Relief?
Employee costs - that is, 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 or organisation - not 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
Which costs qualify for R&D Relief?
To qualify as R&D, any activity must meet the definitions set out by the Department of Trade and Industry (DTI). (This organisation is now known as 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, then you can claim tax relief on revenue expenditure (generally, this means costs incurred in the day-to-day running of the business - not capital expenditure on assets) in the areas outlined below, if all necessary conditions are met.
If you have spent money on something such as staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.
Subcontracted R&D expenditure - if your company or organisation is claiming relief under the SME Scheme, then you may be able to claim back 65 per cent 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 organisation, or you have jointly elected for connected parties treatment, special rules apply.
If your company or organisation is not a 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 Relief is only available for 'revenue expenditure' (generally, day-to-day running costs, as opposed to capital expenditure), if you are involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
The above information is intended to offer an overview only.
