Research and Development tax credits - an outline

Research and Development (R&D) tax credits is an area where we are experiencing an increase in enquiries from our clients. This article provides an overview of the schemes and what is included within a claim.

R&D tax credits are only available to Companies and apply to revenue expenditure (although 100% R&D First Year Allowances are available for Capital Expenditure without limit and in addition to the Annual Investment Allowance). 

R&D must look to advance overall scientific knowledge through resolution of scientific or technological uncertainty. This does not need to be cutting edge science, so as an example how do we make something lighter/stronger/stickier/less photo-degradable etc. Please see HMRC guidance for more detail or feel free to contact us.

There are two schemes, the SME scheme and the Larger Company Scheme

SME Scheme

  • Company must be an SME….(staff <500 AND EITHER Turnover <€100m OR Balance Sheet <€86M). This test applies to a group, if applicable.
  • Not available where state aid has been paid – includes many grants – instead claim should be made under the large company scheme guidelines.
  • Advance assurance clearance available to smaller companies.
  • Qualifying costs;
    • Staffing costs including Salary/NIC/pension/certain reimbursed expenses (reference section 1123 CTA 2009)
      • Agency workers – possibly can claim 65% of related costs
    • Materials and consumable items
      • Includes component parts and items consumed as part of process e.g. chemicals which may be evaporated, burnt etc
      • Includes water, fuel and power relating to R&D activities
    • Software – this must be revenue not capital expense.
    • Subcontracted R&D costs
      • May be able to claim 65% of these costs if unconnected subcontractor
      • If connected, lower of amount paid to other party and that connected party’s relevant expenditure.   
      • If the SME is a subcontractor, it may be able to claim under the large company scheme, but not the SME scheme
  • Qualifying costs attract an extra “super deduction of 130% (i.e. £100 of actual costs gets tax relief on £230.  This increased from 125% on 1st April 2015 
  • For loss making companies, the loss can be surrendered for a payment from HMRC at 14.5% of the enhanced deduction (i.e. the 230%).  Where a loss is created by the R&D claim, the repayment is restricted.
    • As an example: profit per acs £50,000. R&D “super deduction (130%) £80,000.  Loss for tax £30,000.  £30,000 @14.5% = £4,350.

 

Large Company Scheme

  • Until April 2016, choice of 30% Super deduction or Above The Line (ATL) scheme.  Now only ATL (AKA the Research and Development Expenditure Credit (RDEC) scheme).
  • Qualifying costs – as per SME scheme but not subcontracted costs.
  • 11% of Qualifying Expenditure recognised as income in P&L (was 10% to April 2015). 
  • This recognised income is subject to corporation tax!
  • The credit amount is then deducted from the tax payable. An example;

 

Super deduction scheme

ATL/RDEC scheme

Turnover

3,000

3,000

R&D costs

(1,000)

(1,000)

ATL credit

 

110

Other costs

(1,000)

(1,000)

R&D enhancement

(300)

 

PCTCT

700

1,110

CT @ 20%

140

222

Less ATL credit

 

(110)

Tax payable

140

112

 

  • For a loss making company, the ATL credit is repayable net of notional corporation tax.

Turnover

1,400

R&D costs

(1,000)

ATL credit

110

Other costs

(1,000)

Loss to c/fwd for tax

(490)

 

 

ATL credit

110

Less notional corporation tax @ 20%

(22)

Repayable amount

88

Further reference materials;

  • HMRC guidance
  • Legislation: Part 13 Corporation Tax Act 2009

We have a library of further reading resources. If you would like a weblink for any of the areas mentioned, then please do not hesitate to contact our Technical Director, Alan Sowden.

If you would like to discuss if you qualify for R&D tax credits or need assistance with your claim, then please call us on 01865 379272 and we would be delighted to assist.