Research & Development tax credits. “R&D”
Click for : Official .Gov Guidance
Definition of R&D
A project which seeks to:
- Extend overall knowledge or capability in a field of science or technology; or
- Create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
- Make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
- Use scientific or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way.
Will be R&D for tax purposes if the project seeks to achieve an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.
Aim of R&D
Research and development is used to encourage greater R&D spending in order to promote investment in innovation and is a tax relief which can be used to do either of the following:
- Reduce a company’s taxable profits
- Create/increase taxable losses
Who can claim R&D
R&D can only be claimed by companies, relief is not available for partnerships or unincorporated businesses.
Qualifying expenditure
R&D must be carried out by the company or on its behalf and any intellectual property created as a result of the R&D is or will be vested in the company.
Costs that can qualify for R&D are as follow:
- The costs of staff directly and actively involved in the R&D process. Staffing costs include all employment earnings (except that of benefits in kind),employee national insurance and pension contributions as well as costs incurred for that of researchers, managers/staff who plan organise and provide support. This does not include clerical, general management or admin staff.
- The costs of consumables or materials such as power, water, fuel or computer software used directly in carrying out the R&D
- A percentage of any costs that the company has incurred if it has subcontracted the work to another person. Currently 65% of those costs.
Company definitions
A small/medium company as defined as a company that:
- Has less than 500 employees and either or both of:
- Has a turnover of no more than €100 million
- An annual balance sheet totalling no more that €86 million.
If a company is part of a group then the above are applied to the worldwide group.
A large company is one that does not fall under the SME conditions above.
Tax Relief for SMEs
Method 1
A company can claim 230% of enhanced deduction on revenue expenditure. That is to say the company can reduce its taxable profit by an additional £130 for every £100 spent.
The relief can then be set against taxable profits of either the current period, carried back one year against a prior year profits or carried forward against a later periods profits.
Method 2
If the company is small or medium and has losses, they may be able to claim payable tax credits from HM Revenue and Customs. The payable tax credit could amount to £14.50 for every £100 of actual R&D expenditure up to the level of the tax loss for the period. However in order to receive this payment, the enhanced relief must be surrendered.
No such reclaim is available for large companies.
Grants
If the company and has received a notified state aid for a specific project then you can only claim R&D at a rate of an additional deduction of £30 for each £100 spent.
Information Required to be Prepared and Maintained
In order to claim R&D on the staff costs it will be necessary to demonstrate that they have been working on the relevant project, a record should therefore be prepared. Please contact us for further details on how to prepare those records.