Launched by the Government as a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.
The potential to get back up to 33% of qualifying R&D expenditure to inject cash, fund investment & accelerate business growth.
The scope of R&D for tax relief/credit purposes is broader than you may think.
Much of the work you undertake to develop & grow your business can qualify for significant tax credits, irrespective of the Industry you are in.
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 or RDEC (Research & Development Expenditure Credit)
Under both schemes a company can claim back two financial years of qualifying expenditure and then every forward year of qualifying activity.
The Small and Medium-sized Enterprise Scheme
For R&D Tax Relief / Credit purposes 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
From 1st April 2015 the R&D Scheme uplift increases to 130%. Prior to that date the applicable uplift is 125% on allowable R&D costs.
What does this mean?
Each £100 of qualifying expenditure becomes £230 for the purposes of your tax computation, generating an additional £130 to offset against your Corporation Tax liability. Using the 20% Corporation Tax rate equates to a net cash benefit of £26 under the scheme (26%).
If your company makes a loss, you can choose to receive your tax relief by way of R&D Tax Credit – a cash sum paid to you by HMRC which has the potential to net up to 33.35% of your qualifying development costs back in the form of a cash payment.
You can only claim the tax relief or get paid a tax credit if your company is a going concern, its latest published accounts were prepared on an ongoing basis, and nothing in the accounts suggests that its status (as a going concern) depends on it receiving R&D relief or Tax Credits.
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 e.g. if you are a sub-contractor. You may however be able to claim relief 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.
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.
However, 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.
Call 01508 494 345 or email us
Which activities qualify for R&D Relief?
To qualify as R&D any activity must meet the definitions set out by the Department for Business, Innovations and Skills. (Formerly the Department of Trade and Industry DTI).
These guidelines state that the activity must contribute directly to seeking an advance in science or technology or must be a qualifying indirect activity.
A common misconception is that R&D tax relief/credit is limited to a company developing something new and from scratch, however R&D also includes:
- Developing a process or product which already exists in the industry, but where the information to resolve the technological uncertainty is not already available
- Making an improvement to an existing product or process, material, device or system, or duplicating an existing product in an appreciably approved way e.g. exploring new cost effective materials that will perform the same or better technical specification as an available product.
This work doesn’t have to have been successful or taken to market. A claim can be made as long as the activity aimed to achieve a technological or scientific advance.
What costs are included?
If your company and the project both meet the necessary conditions, then you can claim tax relief on the revenue expenditure (generally this means that costs incurred in the day-to-day running of the business – (not capital expenditure on assets) in the areas outlined below, if all conditions are met.
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
If you spend money on something such as staff costs where the employee was only partly engaged on R&D activities, you can only claim for the 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.
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.