Michael O’Brien, head of technology at Kreston Reeves, details what Research and Development relief is and whether your company could qualify.
Research and Development (“R&D”) relief has been around in one form or another for well over a decade, yet the government estimates that there are still thousands of companies that are failing to claim the relief that they are entitled to. Our experienced tax advisors have prepared hundreds of successful R&D claims for projects ranging from the development of new types of paint to the creation of new software platforms.
What activities qualify?
A common misconception is that R&D relief is only available to pharmaceutical companies developing new, cutting-edge wonder-drugs or to manufacturing companies inventing new materials. The reality is that a wide range of activities – such as developing bespoke IT software, combining existing software in an innovative manner not readily deducible by a competent professional in that field, or creating new or more efficient algorithms – may all qualify for R&D relief.
In short, any project that seeks an advance in overall knowledge or capability in a field of science or technology, any projects seeking to resolve scientific or technological uncertainties, and projects seeking to appreciably improve existing processes all potentially qualify for R&D relief.
How much relief is available to me?
There are two R&D schemes currently available to companies – the SME scheme and the RDEC scheme, introduced in 2013 for larger businesses.
The SME R&D scheme allows for 230% enhanced relief to be claimed on qualifying R&D costs, which can be used to reduce the company’s tax liability or be surrendered for a 14.5% payable tax credit from HMRC where the company is loss making. This payable tax credit represents an actual cash payment from HMRC, even where the company is not yet profitable and has not yet paid any corporation tax.
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Qualifying R&D costs includes a wide range of expenses such as wages, employers’ national insurance contributions, bonuses and pension contributions, consumables, software used directly in the R&D, and payments to sub-contractors (usually restricted to 65%).
Companies that do not fall within the R&D definition of a SME (employing fewer than 500 people and with a turnover limit of €100m or a balance sheet totalling less than €86m), or companies that are in receipt of grants, subsidies or other forms of State Aid may be able to claim R&D relief under the RDEC scheme. The RDEC scheme is slightly more restrictive than the SME scheme, with expenses such as subcontractor payments not treated as qualifying costs, but nonetheless can still result in the company receiving a real cash tax repayment of up to 9.72% of its qualifying R&D expenditure, or a reduction in its tax liability from an activity that it will likely have carried out anyway.
There is, however, a time limit for making an R&D claim. Claims under the SME and RDEC schemes must be made within two years from the end of the period of account in which the qualifying R&D expenditure was incurred. For example, a company that has undertaken qualifying R&D activity during the accounting period ended 31 December 2016 must make an R&D claim by 31 December 2018 or miss out on the potential R&D relief for that period.
Michael O’Brien, is the head of technology at Kreston Reeves. He can be reached on: [email protected]
If your company has undertaken, or is planning to undertake, an activity that you think might qualify for R&D relief; whether it is a tech start up in its first year of business, or an established industry leader, we may be able to help you prepare a claim for R&D relief.
For an informal chat over whether an activity may qualify, or for a meeting to discuss how an existing claim can be maximised, please contact your usual Kreston Reeves adviser here or call +44 (0)330 124 1399 and ask to speak to a member of our Corporate Tax advisory department. Visit www.krestonreeves.com