Launched in 2000, the UK R&D Tax Credit Scheme aims to encourage businesses of all sizes to invest in research and development.
The main benefits on offer are a higher rate of corporation tax relief on qualifying research and development (R&D) costs or a repayable tax credit, which can be a lifeline for early-stage businesses in particular.
For SMEs, the corporation tax relief on qualifying R&D costs is 230%, while the repayable tax credit (only available where the company is loss making) is 14.5% of the losses. That means a small company investing £100,000 on qualifying R&D activity can get a £230,000 tax deduction or a £33,350 tax credit repayment (if loss making).
Large companies qualify for a reduced 130% corporation tax relief on relevant expenditure. Alternatively they may elect for a different scheme known as Research and Development Expenditure Credit (RDEC). Discussion of RDEC is outside the scope of this article.
Who can claim R&D tax relief?
R&D tax relief under both schemes is only available to companies; sole traders or LLPs cannot take advantage of the tax relief available even if they are undertaking qualifying R&D.
However, it is available to any UK company undertaking R&D that results in an advance in the field of science or technology. It is not restricted to companies in a particular sector.
What qualifies as relevant R&D?
To identify whether R&D qualifies for tax relief, the government looks at four key areas. First, what is the scientific or technological advancement that your R&D is making? Claimants should focus on the ‘big picture’ advance, rather than the particular product or process being developed.
Second, what are the scientific or technological uncertainties that the R&D is trying to investigate? Scientific or technological uncertainty exists when knowledge of whether something is scientifically feasible or technologically possible is not readily available or deducible by a competent professional working in the field. Uncertainties that can be resolved through a brief discussion with peers or technical problems that have been overcome in previous projects do not qualify. Claimants should give a high level explanation, in a language understandable to the non-experts, of what the uncertainties are and when they started.
Third, how and when were the uncertainties overcome? Here, you should describe in brief detail what you did to overcome the uncertainty. Touch upon what you investigated, your investigation methodology, how you analysed the results and what the results actually were.
Finally, the government will want to know why the knowledge you were seeking was not readily deducible by a competent professional. You’ll need to show that those leading the project are ‘competent professionals’ in the relevant field by outlining their relevant background, professional qualifications and recent experience. Those professionals should then explain why they believe the uncertainties in question qualify under the scheme, providing any available evidence in the process.
What expenditure can you claim relief on?
Several costs qualify for tax relief under the scheme. These include the direct and indirect costs of staff actively engaged in relevant R&D activity. Direct costs are those necessary to conduct the activity while indirect costs include salaries and employee benefits of staff in question.
It is also possible in certain cases to claim for the cost of sub-contractors, consumables and utilities that are used during the R&D process.
Making a claim
Claims are made via your corporation tax return after year end but work on identifying qualifying projects and associated costs needs to start well before then.
When making a claim, you should focus on three areas: Does your project qualify? Do you have satisfactory documentation? Can you show a clear, effective R&D methodology? A well-presented and supported claim is far more likely to succeed. Advice should always be taken before including an R&D claim in your corporation tax return.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances for further advice in this area.
Views expressed in this article are those of the contributor and for general advice purposes only. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained here in can be accepted by the LLP or any of its associated concerns. Kingston Smith LLP is registered to carry out audit work and regulated for a range of investment business activities by the Institute of Charted Accountants in England & Wales.