R&D Tax Relief

Since its introduction in April 2000, many companies developing a product, which includes R&D activities, have become eligible to take advantage of an extremely generous set of R&D tax deduction rules.

Where eligible, SME companies have been able to automatically uplift their actual R&D spend by a notional 100% (125% from 1 April 2012) for corporation tax deduction purposes. This has the affect of, either:

• Reducing the taxable profits and hence the net corporation tax liabilty,
• Converting this taxable profit into a loss, which can either be:
  • Carried back to create a tax refund,
  • Carried forward to (hopefully) reduce future corporation tax payments,
• Surrendered, to create a tax refund (R&D tax credits) of PAYE/NIC paid during the same period.

To be eligible for R&D tax relief, a number of conditions must be met:

• The business must be a UK limited company.
• The expenditure must have arisen since the introduction of the rules in April 2000.
• The company must qualify as SME for the most generous R&D deduction.
• The R&D expenditure must be revenue in nature, not capital.
• The underlying project must meet the government definition of R&D, which is more onerous than normal product development. R&D, for tax purposes, takes place when 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 the company's own state of knowledge or capability.
• The R&D annual spend must exceed the deminimus thresholds (currently £10,000 pa for SME year ends of 30 September 2004 and later).
• The constituent parts of the R&D spent must be related to costs incurred on:
  • Staffing costs (including Er's NIC, pension contributions and reimbursed expenses),
  • Software and Consumable items,
  • Externally provided workers,

In a recent change to HMRC interpretation of these rules, R&D spend on a product which is specifically produced and sold to a customer will qualify for this tax relief, as well as the more common circumstances where the R&D spend is on developing the intellectual property which is owned and exploited in-house.

As well as maximising their overall claim for this R&D tax relief, companies may need to plan activities in advance and amend their remuneration policy, to maximize and bring forward their overall claim.

If an SME business is ineligible to claim the more generous R&D reliefs, perhaps due to expenditure being pre-trading in nature, or subsidised, then it may well still be eligible to claim the large company R&D relief (30% uplift).

R&D tax relief is claimed in the company tax return. Clients who are fearful that the R&D claim within their company tax return may be investigated by HM Revenue & Customs, through a corporation tax enquiry, may wish to consider taking out our fee protection insurance.

Practical Examples of our R&D Tax Relief Expertise

For loss making start-up companies, obtaining a tax refund, even though they have never paid any corporation tax. Changing company year ends to optimise the R&D total expenditure claim.

Successfully convincing an Inspector of Taxes that R&D activities fell within the definition, during an enquiry. Structuring directors' remuneration package so as to maximise the arising R&D claim.