R&D Tax Relief
The scheme exists to encourage innovation in the UK through research and development in the fields of science and technology. It does require there to be a scientific or technological uncertainty to be resolved, but this can be applied to advances in a wide variety of fields. Successful claims have been submitted for, amongst others, tomato plants, wire bending machines, trees, software and goldfish bowls!
There are two schemes: the Small and Medium sized Enterprise (SME) scheme and the Large Company scheme. The relief only applies to companies, not partnerships or sole traders.
The SME scheme generally applies to companies that do not breach the limits of fewer than 500
employees and either an annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million. Circumstances in which a company will fail to qualify include where the R&D project receives any State Aid grant funding (although it is only the funded project which is affected, other R&D projects carried on by the company can still qualify).
The SME scheme is the more lucrative of the two schemes and provides most tax relief. The Large
Company scheme applies to companies who do breach those limits or fail the conditions for the SME scheme for some other reason.
The SME scheme providees an additional tax deduction to the company over and above what they've spent. The rates have steadily increased over the last few years and from 1 April 2012 the rate has increased to 225% - that is to say for every £1 spent on R&D, the company will receive a £2.25 tax deduction.
The company will either benefit from a reduced tax charge or, if the company is loss making, there is the option to surrender the loss created by the R&D claim for a tax credit. Surrendering for a tax credit is less tax efficient as cash is received at only 11% of the amount surrendered compared with a potential tax
saving in future years of between 20% and 24%. However if short term cash is more important companies will presumably go for that ahead of perfect tax efficiency.
The Large Company scheme is less beneficial as it only confers an additional deduction of 30% and
no repayable tax credit is available. However, it can still provide useful relief for companies which fail the conditions for the SME scheme.
Qualifying R&D Activities
To qualify for relief the company must be carrying out an R&D project which is seeking to achieve an advance in science or technology. To qualify as an “advance” the company must carry out its R&D with a view to creating a new, or appreciably improved, product, process or service. The question of whether
something represents an “appreciable improvement” is very subjective but essentially, it is an improvement that a fellow competent professional in the field would consider a genuine and non-trivial improvement. There is also a further requirement that in seeking the “advance”, the company must be seeking to resolve some form of scientific or technological uncertainty.
Whilst it is a requirement that the R&D must involve the resolution of a scientific or technological uncertainty and result in a related advance, the end product, process or service can be virtually anything.
R&D projects which fail or are aborted will also qualify if they meet the other conditions as the project needs only to “seek” an advance, it does not need to achieve it.
Qualifying costs must fall into one of the following categories:
- Staff costs (including pension, employer’s NIC and expenses reimbursed via the
- Consumable items (these must be consumed or transformed in the R&D process)
- Utilities (water, power)
- Subcontracted expenditure
Only the costs incurred directly in carrying out the research and development can be claimed so where costs are incurred on both qualifying and non-qualifying activities, a reasonable apportionment will need to be made. In addition, where costs are incurred on subcontractors, as a general rule only 65% of the payment is allowable.