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[r&d tax relief]

Overview of R&D Tax Relief

HMRC provide a tax relief for Small and Medium Enterprises (SME) that are prepared to invest time and money into research and development where this is some uncertainty to be overcome. This was set up in 2000 when the government recognised that investment into R&D lagged considerably behind other OECD countries and is designed to encourage companies to take a risk in investing in R&D.

SME R&D relief allows companies:

  • If they are making a profit, to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
  • If they are making a loss, to claim a tax credit, worth up to 14.5% of the surrenderable loss

To claim the relief you need to be a SME and show how your project meets the definition of R&D. As with all tax claims, penalties can be crippling if they are found to be wrong, so it is worth engaging with specialist advisers when making a claim.

If an R&D project fails or is abandoned, it still qualifies. In fact, if you include costs of a failed project, it actually strengthens your claim, as there is evidence of uncertainty that you’re trying to resolve.

Who qualifies?

You can claim R&D tax relief if you’re a SME with:

  • less than 500 staff a total turnover of under the GBP£ equivalent of €100m or
  • a balance sheet total under €86m

You cannot claim SME R&D relief if the project is already getting notifiable state aid or you’ve been subcontracted by another company. This means Innovolo cannot claim for any work done on your behalf.

The total staff, turnover and balance sheets of any linked companies should be included in your totals. Your company is linked if:

  • it holds over 50% of the voting rights in another company
  • another company holds over 50% of the voting rights in your company

You need to include a proportion of the staff, turnover and balance sheets of partner companies. You have a partner company if:

  • another company holds over 25% of your voting rights or capital
  • you hold over 25% of another company’s voting rights or capital

This should be based on the percentage of voting rights and capital that connects the 2 companies. For instance, if you own 30% of another company you should include 30% of its staff, turnover and balance sheets when calculating if you’re a SME.

What can you claim?

You can claim certain costs on the project from the date you start working on the uncertainty until you develop or discover the advance, or the project is stopped.

Staff costs

For staff working directly on the R&D project, you can claim a proportion of their:

  • salaries
  • wages
  • Class 1 National Insurance contributions
  • pension fund contributions

You can claim for administrative or support staff who work to directly support a project. For example, human resources used to recruit a specific person to work on the project. You cannot claim for clerical or maintenance work that would have been done anyway like managing payroll.

You can claim 65% of the relevant payments made to an external agency if they provide staff for the project.

Subcontractor costs

You can claim 65% of the relevant costs of using a subcontractor for your R&D activities.

Consumable items

You can claim for the relevant proportion of consumable items used up in the R&D. This includes:

  • materials
  • utilities

Costs that cannot be claimed

You cannot claim for:

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

Work out when the R&D activity starts and ends

The R&D activity starts when you begin working to resolve the uncertainty. You’ll need to identify the technical issues that need to be resolved, and make sure there is not an existing solution that has already been worked out. These issues should be documented to help defend any challenge to the claim.

The R&D activity ends when you solve the uncertainty or stop working on it. The activity you claim R&D relief for should end once you have a working prototype that solves the problem, and before you go into production. Your R&D may restart if you find another scientific or technological uncertainty after you’ve started producing the product. If this happens, you can claim for further R&D while you try to resolve it.

How to claim R&D tax relief

You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.

You can claim the relief by entering your enhanced expenditure into the full Company Tax Return form (CT600).

To calculate your enhanced expenditure you need to:

  1. Work out the costs that were directly attributable to R&D.
  2. Reduce any subcontractor or external staff provider payments to 65% of the original cost.
  3. Add all costs together.
  4. Multiply the figure by 130% to get the additional deduction to put in to your tax computations.
  5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.

Innovolo can help you by providing a calculation spreadsheet that can work this out for you. You should keep this on record to help defend any tax investigation.

If you make a trading loss, you can choose to surrender this and claim a tax credit. You can find out how to convert tax relief into payable tax credits in the Corporate Intangibles Research and Development Manual.

How to support your claim

You can add the details of your claim when you submit your return. It will help your claim if you include a short summary with your claim that explains how your project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • overcame this uncertainty
  • could not easily be worked out by a professional in the field

You can also show a breakdown of your total costs and how they were apportioned to the R&D project, for instance the percentage of total staff costs or utility costs used. You can also show that subcontractor or external staff payments were reduced to 65%.