Research and Development (R&D) tax relief was first introduced by the Government in 2000, and was a focal point of its strategy to actively encourage innovation and business development across the United Kingdom. While the relief was initially targeted at small and medium-sized enterprises (SMEs), HMRC relaxed the thresholds for applicants in 2002, meaning larger companies (LCs) were also eligible to claim.
On November 23, 2016 – in a move welcomed by UK Research Councils – Chancellor Philip Hammond announced that an additional £2 billion a year was being made available for R&D until the end of the current parliament. Here are some of the queries I am regularly asked…
What qualifies under the R&D banner?
For tax purposes, R&D takes place when a project is undertaken which seeks to achieve an advance in science or technology. The activities that contribute to achieving this advance through the resolution of scientific or technological uncertainty are R&D. Don’t let the words ‘science’ and ‘technology’ discourage you from investigating this further; there is a wide array of activities businesses can undertake to qualify.
When claiming for R&D tax relief, what are the thresholds for businesses?
Whether a business falls under the SME or LC threshold depends simply on size and turnover, and will have ramifications on the amount of relief it can claim.
Broadly speaking, if an organisation has fewer than 500 employees, a turnover less than £100m, and a balance sheet that does not exceed £86m, it will qualify as an SME. These rules, however, should be considered in further detail if a company is part of a larger group. The attributes of LCs are simply above these thresholds. It’s been a common misconception in the past that R&D relief is reserved for larger organisations – this simply isn’t the case, and the Government actively encourages smaller companies to claim.
If my business filed a successful R&D claim, what benefits would it see?
Depending on profits, a company will benefit from R&D claims via either a reduction in its corporate tax liability or, in some cases, by receiving a cash repayment.
SMEs receive an additional 130 per cent enhanced rate of relief, so if an SME incurred £100,000 of qualifying R&D, it would obtain an additional £130,000 of deductible expenditure. Based on the current 20 per cent rate of corporation tax, the SME would receive a cash tax saving of £26,000. It is worth noting that the corporation tax rate will be reduced to 19 per cent from April 1, 2017.
If the SME is operating at a loss, the company could surrender the lower of its taxable loss or R&D expenditure in the period, in return for a cash repayment of 14.5 per cent.
On the other hand, if an LC is making a claim, it can reclaim 11 per cent of the R&D expenditure incurred under the large company Research and Development Expenditure Credit (RDEC).
Are R&D claims restricted to certain sectors?
No. Businesses across a wide range of sectors have benefited from R&D tax credits, but management teams often underestimate how innovative the work their company undertakes is. In our experience, we have seen claims made in IT, architectural, manufacturing, pharmaceutical and service sectors.
Typical costs included in an R&D claim include staffing costs, expenses for software and expenditure on consumable or transformable materials.