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:
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:
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!
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