R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.
Who can claim R&D
Only companies are entitled to the relief but companies that carry out R&D as members of partnerships may qualify provided the company incurs the expenditure that is relevant to its trade.
The company can be small/medium or large. The rate of relief is different for small/medium companies to large companies (see “how it works” below).
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. But, if your company is small or medium sized, you may still be able to claim, as a subcontractor, under the Large Company Scheme
Definition of Large, Small and Medium sized (SME) companies
A company is a large company if it does not qualify as a Small/medium company (SME). For the purposes of R&D relief an SME is a company which meets the normal conditions specified in the EU SME definition, except that it may have up to 500 staff, turnover up to €100m and balance sheet total up to €86m.
How does it work
Research and Development (R&D) tax relief (or credit) is a company tax relief that can either reduce a company’s tax bill or, for some small or medium sized (SME) companies, provide a cash sum provided that the company meets certain conditions. It is based on the company’s expenditure on R&D.
The R&D tax credit works by allowing companies an increased, or enhanced, deduction in respect of qualifying expenditure on R&D activities. The enhanced deduction either reduces the company’s profit, or increases its losses, for tax purposes if certain conditions are satisfied.
SMEs may be able to claim tax credits in cash from HMRC if they have losses in the accounting period but the enhanced relief must be surrendered in order to receive this payment. HMRC will make payment only after they receive your return.
Amount of relief
A small and medium sized company incurring R&D expenditure of at least £10,000 (£25,000 for accounting beginning before 27 September 2003) in a 12 month accounting period can obtain relief for 200% (applying from 1 April 2011) of that expenditure. Subject to State approval aid, the relief will increase to 225% from 1 April 2012.
For expenditure between 1 August 2008 and 1 April 2011 relief was 175% and 150% for period before 1 August 2008.
Companies can show this relief as expenditure in the profit and loss account or as an adjustment to the taxable profit.
Large companies may claim R&D relief of 130% of their qualifying revenue expenditure of at least £10,000 (£25,000 for expenditure incurred before 1 April 2008). That is, for each £100 of qualifying costs, the 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.
Companies that have not started to trade may treat the R&D relief as a trading loss. Where a company has an unrelieved trading loss (excluding brought forward or carried forward losses) it may surrender the R&D tax relief in exchange for a tax credit equal to 12.5% for expenditure from 1 April 2011(previously 14%) of the surrendered amount. This tax credit cannot exceed the company’s PAYE tax and NIC liabilities.
For there to be R&D for the purpose of the tax relief, a company must be carrying on a project that seeks an advance in science or technology. The advance being sought must constitute an advance in the overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.
The expenditure claimed must follow the definition of R&D under the Generally Accepted Accounting Provision (GAAP) and the guidance provided by the Department of Trade and Industry.
Expenditure incurred in accounting period commencing on or after 1 January 2005 must be deducted as Intangible asset. The expenditure must have been incurred during the accounting period.
The relief must be claimed by the company; it is not automatically given.
The company must be operating as a going concern.
What type of expenditure qualify
Qualifying expenditure includes:
2. Externally provided workers
4. Sub contracted activity
5. Clinical Trial
Subsidies and grants - If your company or organisation has received a subsidy or grant for an R&D project, this may affect how much tax relief you can claim.
For further information follow link to HMRC website: http://www.hmrc.gov.uk/ct/forms-rates/claims/randd.htm
R&D is available on revenue expenditure only. Capital expenditure that a trader incurs on research and development directly undertaken by the trader or on the trader's behalf is eligible for research and development allowance (RDA) under capital allowances. The rate of RDA is 100% of qualifying expenditure. A person does not need to claim the full 100% RDA but if a reduced amount is claimed the balance cannot be claimed later. There are no balancing allowances for RDA. There is a balancing charge if there is a disposal event and the disposal value is more than any unclaimed R & D.
When to claim
You must make any claim for R&D Relief in your Company Tax Return or amended return. The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period.
Record keeping for R&D Relief
There is no specific record keeping requirement for R&D Relief claims. However, HMRC may ask to see your company or organisation's records when they make a compliance check into your Company Tax Return or R&D Relief claim made separately from a return. As ever records should be sufficient to support the entries in your accounts and CT600.
Where a transaction is attributable to arrangements entered into wholly or mainly with a purpose of gaining an R&D tax relief that would not otherwise be available (seen as an artificial avoidance arrangement), or of increasing the amount of deduction or the payable credit beyond what was otherwise available, then the transaction can be disregarded in determining the amount of any R&D tax relief or payable credit (CTA09/s1084).
Incorrect claims could lead to enquiries and therefore great care should be taken when making and R&D claim.
For any further information on any of the issues outlined in this piece, please call the Advice Service on 01455 852555.