Launched by the Government as a UK tax incentive designed to boost innovation and encourage companies to invest in R&D, these schemes, administered by HMRC, can help companies to 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 broad, and much of the work undertaken to develop & grow a business can qualify for significant tax credits, irrespective of the Industry sector.
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
Typically SMEs get back up to 33% of the amount they've spent on qualifying R&D.
The Research and Development Expenditure Credit (RDEC) scheme
larger organisations can apply to RDEC for a 12% benefit given as a taxable credit on the amount of qualifying R&D expenditure payable as cash or as an offset against the company’s corporation tax liabilities.
A company can claim RDEC going back two full financial years.
Which can 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 and designing new products from scratch, however R&D also includes:
- Improving existing processes, services, materials or devices
- Developing prototypes or perform testing
- Developing software or IT solutions
- Employment of staff with a technical or scientific background
Failed projects or developed products that are never launched may also qualify. A project 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.
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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, and maybe subject to changes implemented by the UK Government from time to time
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