What does my business have to do to qualify for Research & Development tax relief and how is this tax relief given?
The government’s Research & Development tax relief incentive allows companies to claim additional tax savings on the research costs they incur. The enhanced relief was established to encourage innovation in the UK however many innovative companies are still not claiming it. The 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. According to recent statistics provided by HMRC the average claim made by small and medium sized companies in the UK in 2016/17 was £53,876, but for many companies it was much more.
There is a common misconception that R&D tax relief is associated with work carried out by scientists in laboratories and that the innovation required needs to be ground breaking or revolutionary in order for a company to qualify. Sometimes the various everyday activities of a business can qualify as innovative. The government has deliberately kept their guidelines very broad in an effort to encourage as many companies as possible to benefit from this tax break. So, if a company is using science or technology to create a new product, process or service – or working to improve those already available – it is likely that it could qualify. Most companies are unaware of the diversity of projects which qualify and therefore fail to claim their tax relief entitlement.
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. The tax relief given to an SME is 230%. Alternatively, an SME may claim a payable R&D tax credit for an accounting period in which it has a loss. This means that if your company is profitable and has incurred R&D costs of £100,000 the company’s corporation tax liability will be reduced by £43,700, assuming a 19% corporation tax rate, giving the company an effective tax relief on the actual expenditure, of 43.7%.
If, on the other hand, your company is making losses, the £230,000 attributable to the R&D expenditure can be converted into a payable R&D tax credit. The rate of conversion is currently set at 14.5% so if there are sufficient losses to surrender, this could generate a payment to the company of up to £33,350.
Eligibility for this tax relief is through qualifying activities, rather than a specific industry or sector. A wide range of industry sectors have successfully made claims including digital technology, manufacturing, architecture, engineering, pharmaceutical, digital technology, food, ICT, construction and renewable energies, to name a few.
HMRC guidelines suggest that when making the claim for tax relief a company should consider whether there has been a scientific or technological advance as a result of the R&D activity and also whether any uncertainties have been resolved which were not readily deducible by a competent professional in the field. The normal time limit for making a claim for this tax relief is two years after the end of the relevant Corporation Tax accounting period.
The advice above 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.