R&D Tax Relief

Research and Development Tax Relief

When Research & Development (R&D) tax reliefs are mentioned, most people naturally think that these are for scientific research or technology companies. However, R&D tax reliefs are actually intended to help any company that is developing new or improved products, processes or software, according to Jan Fachot Assistant Director at PEM.

He says: “R&D tax reliefs enable certain companies to deduct up to 225% of qualifying R&D costs in their tax return resulting in significant tax savings. If the companies have sufficient tax losses, then these can surrender the R&D enhanced deduction for a 14.5% cash repayment.”

R&D tax reliefs have been in existence since 2000 but since 1st April 2012 they have substantially improved with the increase in the rates at which R&D tax reliefs are given and also the removal of certain restrictions. 

Jan continues: “Indeed, the latest figures published from HM Revenue & Customs (HMRC) reveal that the number of R&D tax claims in 2012-13 rose from the previous year by 26% to nearly 16,000 representing £1.4 billion of tax relief support for UK businesses. This increase is linked to the Government’s improvements to the R&D tax reliefs as well as more businesses becoming aware of their ability to claim R&D tax reliefs.” 

What is R&D? 

Jan explains: “The biggest misconception appears to be what constitutes qualifying R&D activities for tax purposes. The guidance defines to R&D as ‘a project that seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainties’.” 

This could imply that a qualifying project must be groundbreaking work carried out by people in white coats in a laboratory. However, as long as that there is a new or improved product, process or software being developed then it is worthwhile examining whether a company is entitled to R&D tax reliefs. Examples of projects that have successfully qualified for R&D tax reliefs include:

  • Development of bespoke software systems for businesses (either with or without assistance from specialist software development firms)
  • Development of improved strains of crops, plants, or livestock with greater protection from disease
  • Researching suitable materials for use in clothing and products
  • Innovative architectural and engineering projects such as retractable roofs and sound proofing.

Jan says: “Our experience, which is supported by the recent figures published by HMRC, shows a concentration of R&D claims in manufacturing, scientific and IT sectors but also that R&D claims are being made in every other sector as companies realise that the definition is much broader than they realised.”

Is it worth claiming R&D tax relief? 

Under the Small and Medium Enterprise (SME) scheme, the most generous R&D tax relief allows an enhanced deduction of up to 225% for qualifying costs in a company’s tax return, significantly reducing its corporation tax bill It is also possible for a loss-making SME company to instead claim a cash credit of 14.5% on the enhanced qualifying costs. 

Larger companies (groups with over 500 employees and breaching certain financial thresholds) are eligible with effect from 1 April 2013 for the R&D Expenditure Credit which gives a pre-tax credit of 10% on qualifying costs which after tax equates to a net benefit of 7.9% to the company. This credit is accounted for as operating income thereby improving the financial position of the company in its accounts. However, a significant improvement is that if the company is loss making, the net benefit can be surrendered for a cash payment from HMRC. 

The Chancellor announced in the Autumn Statement on 3rd December 2014 that the enhanced R&D deduction given to SMEs will increase from 225% to 230% from 1 April 2015. On the same date, the R&D Expenditure Credit for larger companies (groups with over 500 employees and breaching certain financial thresholds) will increase from 10% to 11%. R&D tax reliefs are not only relevant to scientific research or technology companies but possibly to companies that are developing new or improved products, processes or software.

Jan concludes: “As you would expect HMRC will scrutinise R&D tax claims carefully so it is advisable to involve an expert who can interpret the guidance and apply this to the activities of the company. Supporting documentation should also be submitted to HMRC with R&D tax claims as this significantly improves a company’s likelihood of the claim being processed efficiently without a lengthened enquiry.”

If you would like to find out more information about R&D tax relief please contact Jan Fachot on 01223 728269 or email jfachot@pem.co.uk


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