My company is currently carrying out some research into a new process which we hope will enhance our product range significantly. It is unclear yet whether our time and effort will be successful however we have incurred a lot of costs and additional expenses as a result of this research. What extra tax relief can we claim, as a small company in respect of these costs?
R&D tax relief allows companies to claim additional tax savings on the research costs they incur. The enhanced relief can help fund the technological advances needed to keep a company competitive, by reducing its tax bill or providing the company with cash, if the company is loss making. It can be claimed by a range of companies that seek to research or develop an advance in their field.
R&D tax credits are available to small and medium-sized companies (SME’s) and also to large companies. An SME is a company which has fewer than 500 employees and either a turnover of less than €100m or a balance sheet of less than €86m. When you’re considering these limits you may need to include any company that has a shareholding of 25 per cent in your company and any company your company holds a 25 per cent share in. SME’s are now permitted to claim an additional 130% tax deduction for qualifying R&D expenditure, as well as the normal 100%. This means that an SME paying tax at the small company tax rate can currently enjoy a tax saving of approximately 44 pence for every pound spent on R&D. Alternatively, if the company is loss making, then the losses attributable to the R&D costs can be surrendered for a cash refund from HMRC, worth up to 14.5% of the surrenderable loss.
Therefore, if your company spends, say, £100,000 on qualifying research and development in 2018, it can claim a tax deduction of £230,000 against profits in its 2018 tax computation.
Before making a claim, it is important to ensure that the relevant expenditure meets the R&D criteria, and is not of a capital nature. There is widespread misunderstanding as to what is meant by R&D in the context of obtaining tax relief. Your project must aim to create an advance in the overall field, not just for your business. This means an advance can’t just be an existing technology that has been used for the first time in your sector. The R&D must be work which ‘breaks new ground’. This may be in pursuit of the creation or development of, for example, new substances, materials, designs, processes, technology or knowledge. The work must be “innovative”. Periodic alterations to existing products or processes, even though these may represent some improvement, would not qualify. Similarly, operational research, not tied to specific R&D activity and market research would not qualify. You should be researching or developing something that isn’t known to be scientifically or technology feasible when you make or discover it and you need to be able to explain the work you did to overcome the uncertainty. This can be a simple description of the successes and also the failures you have had during the project.
Specific guidance should be taken to ensure that you benefit from the maximum tax relief or cash repayment available in respect of your R&D costs.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.