R&D Tax Relief: Are You Missing Out?
Overview
The research and development tax relief provisions allow companies undertaking R&D activities to claim additional tax relief on the costs of carrying out R&D. Small and medium-sized companies in the their infancy that are loss making due to these activities can also apply to exchange those losses for a repayable tax credit from HMRC.
Qualifying R&D Activities
Relief is considered on a project-by-project basis. An R&D project qualifies for the relief if an advance in overall knowledge or capability in a field of science or technology is sought through the resolution of a scientific or technological uncertainty.
It is not enough that a product is commercially innovative, but enhancing an existing product or process to make them more commercially viable is acceptable.
The typical image conjured when thinking of R&D is that of an inventor in a shed but this is just the tip of the iceberg in terms of what sort of activities qualify. Over the past few years we’ve advised on claims regarding the following:
- Online marketing platforms
- Peer-to-peer platforms
- Algorithms that manipulate Big Data
- Sea level prediction algorithms to optimise ship schedules
- Synthesis of biological mediums for improved studying of bacteria
The thought process has to begin with, “Are we doing something unconventional or different to everybody else?” If so, then the availability of R&D relief should be explored.
R&D Advance Assurance
HMRC introduced R&D Advance Assurance in November 2015, which allows companies to seek HMRC’s opinion on whether the project qualifies for R&D relief before the claim is made on the tax return.
If Advance Assurance is granted then R&D relief claims for the first three accounting periods of the project will be allowed without further enquiry from HMRC.
Qualifying R&D Expenditure
Only certain costs qualify for the relief. The largest cost for most companies will be the cost of employees and subcontractors engaged in R&D activities but transformable materials, power, fuel, water and certain software can also be included in the claim.
Where the expenditure has been incurred for both R&D and normal company operations then only the R&D proportion can be claimed.
How Does the Relief Work?
Tax relief is given by “enhancing” the qualifying R&D expenditure so that the R&D cost being offset against the company’s income is greater than the actual cash cost incurred. There are two schemes depending on the size of the company:
- The small and medium enterprises (SME) scheme
- Enhancement since 1 April 2015 is 230%
- Losses arising out of the enhancement can be exchanged for a tax credit worth 14.5% of the loss
- The large company scheme
- For companies with more than 500 employees and turnover of more than €100m
- Enhancement since 1 April 2015 is 130%
- Losses cannot be exchanged for a tax credit
Complications
As with any tax law, there are complications that need to be considered. The main area is that of grants received to carry out R&D. The R&D relief available is so generous that under EU rules it constitutes State Aid. To ensure a level playing field across member states, the EU restricts the amount of State Aid that governments can give so R&D relief is only available under the large company scheme when companies are in receipt of grants. The interaction between grants and R&D relief is one that should be considered carefully.
Another area is if a company is subcontracted to carry out R&D. The SME scheme can’t be used in this instance either.
What Does Brexit Have in Store for R&D Relief?
R&D funding from the EU would drastically reduce if not disappear but one would assume there will be a removal of the restrictions on State Aid. It will be interesting to see if the UK government will counteract the drop in R&D grants from the EU by either making more grants available itself or by increasing the R&D relief available. It’s quite a shortfall though: according to the Royal Society, the UK received €8.8bn of R&D funding from the EU in the period from 2007 to 2013.
Don’t Miss Out
There are very generous tax reliefs available to company’s carrying on R&D activities so get in touch if you think you have a case for claiming R&D relief. Don’t miss out!
