Research and Development Tax Relief
Introduced in 2000, the Research and Development (R&D) tax relief is a corporate tax relief which is designed to stimulate innovative activity in almost all areas of UK businesses to maintain the UK’s leading position.
Since its inception, the scheme has provided more than 35,000 UK companies with over £9.5 billion in tax relief which has helped fund more innovative projects. However many companies are still missing out.
Mention R&D to most business professionals and their minds are immediately transported to a laboratory full of scientists frantically striving for their next eureka moment. This is a common misconception and one which has led to R&D tax relief being among the most under-utilised tax incentives currently available to UK businesses.
The truth is that research and development activity does not have to be ‘blue sky’ innovation nor does it have to consist of creating new technologies. Activity linked to uncovering and enabling the development of new products, processes and services could potentially be eligible for R&D relief and these are activities which most companies undertake in some form or another.
So which companies are eligible for R&D tax relief
Companies in which potential R&D claims are available include construction, advertising, telecoms, financial services, media and entertainment, clothing, textiles and fabrics, food and drink producers & processors, insurance brokers, water recycling and water treatment and farming to name a few as well as the more obvious manufacturing, energy, defence and life sciences industries. Software, internet and communications are good examples of R&D in supporting functions as well as industries in their own right.
In the first instance, R&D is defined by reference to projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones.
So how does the R&D tax relief work?
For Small and Medium Sized Enterprises (“SME” i.e. those with fewer than 500 employees and turnover not in excess of 100 million Euros or balance sheet assets not in excess of 86 million Euros) the scheme provides for an enhancement of 230% on ‘qualifying expenditure’ incurred after 1 April 2015. What this means is that for every £1 spent by the company towards ‘qualifying expenditure’, the company can claim £1.30 as an additional expense to reduce its taxable business profits.
For profitable/tax paying companies, this enhancement will reduce the amount of corporation tax payable. This saves additional corporation tax at an effective rate of 26% based on an enhanced relief of 230%.
Loss-making SME companies can elect to surrender the enhanced R&D tax loss for a tax credit payment from HM Revenue & Customs. The effective tax rate on a R&D tax credit payment from 1 April 2015 is 33%.
What is “qualifying expenditure”
This falls into 5 key categories:
- Staff costs – this includes the cost of employing staff directly who are actively engaged in carrying out the R & D itself
- Consumables – these include consumable or transformable materials used directly in carrying out the R&D
- Externally provided workers and sub-contracted labour – this covers the cost of paying a staff provider for staff provided to the company, or a sub-contractor who is directly and actively engaged in carrying out the R&D
- Software – Revenue expenditure incurred on computer software employed directly in R&D
- Utility costs – power, water, fuel used directly in carrying out R&D, but not for instance telecommunication costs and data costs.
How far back can a company go to claim R&D relief?
Retrospective claims can be made for the past two accounting periods which can often result in a significant repayment of corporation tax, or if a company is loss making, a claim for R&D tax credits. It is therefore important to discover whether a claim can be made as soon as possible so as not to miss out due to time limits.
Sounds lucrative right? So how can Charterhouse help?
At Charterhouse we have extensive experience in preparing claims and agreeing these claims with HM Revenue & Customs’ specialist R&D units.
We work closely with the company’s technical and accounting departments to produce a report that details both the nature of the company’s R&D activities and maximises the costs that can be included in the claim.
Our fee structure can be flexible and we can quote on either a fixed fee basis, time spent by our consultants, or contingent upon success of the claim.
If you would like to discuss a potential claim for your company please contact our office on 0208 863 4566 to speak to one of our members.
Charterhouse is a dynamic accountancy practice located in Beaconsfield and Harrow, providing services to many surrounding towns such as High Wycombe, Watford, Uxbridge, Slough, Maidenhead and throughout the UK. Charterhouse writes blog articles to help provide expert advice on tax and accountancy matters.