Research and Development (R&D) Tax Credit

Research and Development (R&D) Tax Credit

A range of companiesthat invest in innovative projects in science and Technology may enjoy Research and Development (R&D) relief for work done to research or develop an advance in their field excluding any advance within a social science like economics or theoretical field e.g. pure math. Firms can even claim it on unsuccessful projects. The Government of the UK through R&D expenditure credit (RDEC) had attempted to encourage research and innovation in the field of science and technology. Large company scheme has been replaced by R&D expenditure credit (RDEC) from April 2016.

Small and medium-sized enterprises that subcontracted by large companies to conduct R&D work or who have received any grant or subsidy for the R&D project may also claim relief under RDEC.

R&D tax relief for SMEsallows companies to:

  • make a total deduction of 230% (extra 130% of qualifying costs from yearly profit in addition to normal 100% deduction)
  • claim a tax credit in case company is making loss, up to 14.5% of the surrenderable loss (S1055)

Who Can Claim?

  • SMEs with :
  • turnover of less than €100m or total of balance sheet under €86m
  • Staff members less than 500
  • Connected companies– total should be inclusive of the staff, turnover and balance sheet of any connected company.
  • Partner companies– proportion of the staff, turnover and balance sheet of partner companies to be included on the basis of the percentage of voting rights and capital among the two companies.

What Costs Can Be Claimed?

  • Employee costs- you can claim a proportion of the following for staff working directly on R&D project:
  • salaries
  • wages
  • Class 1 National Insurance contributions
  • pension fund contributions

Employee costs may also be claimed for any support staff who work directly for supporting to R&D project or also 65% of any payments made to an external agency for providing the staff for the project.

  • Subcontractor costs– 65% of the relevant costs of using a subcontractor for R&D activities.
  • Software– software license fees purchased for the R&D project and reasonable share of costs for software partly used for R&D activities.
  • Consumable items- includes materials and utilities.
  • Clinical trials volunteers– in the pharmaceutical industry, one can claim for payments made to volunteers involved in clinical tests.

Cost that Can’t be Claimed:

  • capital expenditure
  • the cost of land
  • rent or rates
  • the production and distribution of goods and services
  • the cost of patents and trademarks

As discussed earlier to qualify the work for R&D relief, it must be a project to make an advancement in science and technology. Also, it must be related to the company’s trade. Apart from it you need to satisfy the below mentioned talking points in support of your project to be qualified for R&D relief:

  • looking for an advancement in science and technology
  • existence of uncertainty to overcome
  • efforts made or tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

Steps to Calculate RDEC

  • figure out the costs that were directly associated with R&D project
  • less any relevant payment made to external staff provider up to 65% of the original cost
  • Add all costs together
  • Multiply the figure arrived by 12% to get the expenditure credit
  • Enter this figure to your tax return

The expenditure credit has been increased to 12% (from 11%) and applies to the company’s expenditure incurred on or after 1 January 2018. Depending upon your company whether its making profit or loss, the credit may be either used to discharge the liability or result in a cash payment.

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