Research & Development Tax Credits
Research and Development (“R&D”) tax credits is a subject we have covered a few times in Muras Matters over the years but research suggests it is still a relief which is under claimed. Further the relief has been enhanced by successive Governments and last month HMRC launched a consultation on how SME’s could be encouraged to make a claim.
The R&D scheme is a tax incentive to encourage investment in innovation and technology by companies (it is not available to individuals or partnerships). When the scheme was first introduced in 2000 the rate of relief for SMEs was 150% of qualifying expenditure but has been increased for the fourth time to 230% with effect from 1 April 2015. Currently, small and medium companies can claim up to 225% (since 1 April 2012) tax relief for qualifying expenditure on R&D activities.
According to industry research, there were 12,000 R&D claims made in 2012, worth a total of £1.2bn. By 2020, it is anticipated this will increase to 33,000 claims.
Under the scheme small/medium sized companies are currently able to deduct an additional 125% of qualifying R&D costs from their taxable income. After 1 April 2015 for every £100 spent tax relief of £230 is available. If this deduction generates a tax loss it is then possible for the loss to be surrendered in exchange for a cash payment.
The ability to surrender a loss in this way can make the scheme particularly attractive for start up businesses for whom it may be a valuable source of funding.
To qualify as an SME a company must meet the EC definition of small/medium which is broadly a company with less than 500 employees and turnover of less than €100m or total assets of less than €86m.
Large Company Scheme
A large company is able to deduct an additional 30% of its qualifying R&D spend from its taxable profits. Large companies can surrender a loss in a similar way to SME’s but at a less valuable rate to the SME scheme.
Companies can claim R&D tax credits on revenue expenditure incurred on employing staff directly engaged in carrying out R&D, and on consumables, power water and software utilised in the R&D process.
There are separate rules for subcontracted R&D, some restrictions on relief where grants or subsidies have been received, and claims are not permitted if the company is not a going concern.
R&D is defined by reference to the Department of Trade and Industry guidelines but is deliberately ‘technology neutral’ so that claims are possible in any field of science, technology or engineering. The key feature is that there is an extension of knowledge or capability in a particular field, or an appreciable improvement in an existing product or process.
Many companies have not claimed their R&D entitlement because they are unaware that they would qualify or because they believe that the claim process is onerous. With the 230% rate of relief from 1 April 2015 and the surrenderable loss, it is a very important relief to be aware of.
To ensure you don’t miss out on this valuable relief and to obtain further information please contact our Tax Director Jenny Marks.
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