The Government has earmarked around £1.5bn of tax relief per year for research and development (R&D) activities. What does this mean for you? If your company has undertaken some R&D work, or even if you’ve worked for another company on their R&D project, you might be able to get a slice of the action.
What classes as R&D?
Before we explain how and what you can claim, it’s best to nail down exactly what the Government classes as Research and Development.
Sadly, simply spending money developing a product that you believe to be commercially innovative isn’t enough – the Government will want to see you’re investing in something that’s aiming to advance science or technology.
The key requirements are that the project must:
- be seeking an advance in the field of technology or science
- be considered commercially innovative
- incorporate science or technology that is not readily available in your industry
- relate to your company’s trade – you must be intending to use the findings for your business
Additionally, your company must not currently be receiving state aid or subsidised expenditure.
There are also restrictions on the type of expenditure you can claim R&D tax relief on. Any expenditure you want to claim must be for revenue costs (i.e. those related to daily running costs). Capital assets – such as those for equipment and buildings – don’t qualify.
The expenses must also fall into one of a set list of categories, including employee costs, materials, software, and consumables.
To give you an idea of who can claim, here are a few real-world examples of Crunch clients who, with our help, managed to successfully apply for R&D tax relief.
Content marketing company
The company’s vision was to create a solution for content marketers and technical companies focused on key areas, including social media management, content marketing, and speech writing. The company engaged in R&D activities to develop a bespoke web platform, providing relevant, personalised, and curated technological contents as well as an analysis of marketing score for their clients’ industry and market. The project’s field of science and technology was content research and data management software.
Creative development studio
Our second example is a company that helps brands and corporations understand and implement innovative virtual and augmented reality technologies. The company was acting as a subcontractor to deliver a particular technical solution to a large corporation, who retained the intellectual property arising.
Both companies were eligible for Research and Development tax relief.
When do I need to claim for Research and Development tax relief?
The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period. You can make your claim for R&D tax relief in your Corporation Tax return or amended return.
Types of relief claim
There are two schemes available to small businesses: the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme.
Before we go into the details of each, here’s a quick overview of what can be claimed under each scheme:
|Scheme||Tax year||Enhanced deduction*||Payable credit (loss making)||Relief|
*Enhanced deduction is the total amount of the actual expenditure, plus 125% or 130% relief
The SME Scheme
As its name suggests, the SME scheme is aimed at small and medium-sized enterprises. However, the definition of an SME varies. For R&D purposes, an SME is defined as one with under 500 employees and either an annual turnover of €100 million or a balance sheet under €86 million.
Certain other restrictions apply, for example if your company is part of a larger company that falls outside of this definition, or is in liquidation or administration, you won’t be able to to get your hands on a tax credit.
Example 1 (profit-making SME)
|Taxable profits (before R&D claim)||£200,000|
|Corporation Tax liability on profit at 20% rate||£40,000|
|R&D expenditure (included in the profits above)||£100,000|
|Tax credit value of R&D expenditure (130%)||£130,000|
|Adjusted taxable profit before corporation tax (£200,000 – £130,000)||£70,000|
|Adjusted Corporation Tax liability at 20% rate||£14,000|
|Corporation Tax saving (£40,000 – £14,000)||£26,000|
Example 2 (profit-making SME)
|Taxable profit (before R&D claim)||£400,000|
|Corporation Tax liability on profit at 20% rate||£80,000|
|R&D expenditure (included in the profits above)||£320,000|
|Tax credit value of R&D expenditure (130%)||£416,000|
|Adjusted taxable profit before Corporation Tax
(£400,000 – £416,000; the £16,000 loss can be carried back or forward)
|Adjusted Corporation Tax liability at 20% rate||nil|
|Corporation Tax saving||£80,000|
Example 3 (loss-making SME)
|Total Loss (before R&D claim)||£100,000|
|Corporation Tax (not applicable as making a loss)||nil|
|R&D enhanced expenditure (£50,000 x 130%)||£65,000|
|Adjusted loss ( £100,000 + £65,000)||£165,000|
|Refund for R&D activity (14.5% of £165,000 )||£23,925|
If an SME successfully applies for R&D tax relief and, as a result, makes a loss for Corporation Tax purposes, the loss can be:
- carried back to the previous accounting period
- carried forward and offset it against future profits
- surrendered to HMRC in return for a tax credit
The RDEC scheme
If you are a subcontractor working via your limited company, you may be able to claim under the RDEC scheme. If your company is engaged in a contract with a large corporation to carry out R&D activity, where the large corporation will have the rights to the intellectual property, you could be able to claim the R&D tax relief.
From 1 April 2015, the RDEC percentage was increased to 11%. So, combined with the reduction in the corporation tax rate to 20%, also from 1 April 2015, the net cash benefit to a large company is now 8.8% of its qualifying R&D expenditure.
Example (subcontractor working for a large company):
|Credit Rate 11%||£11,000|
|Gross credit amount (to be included in taxable profits)||£11,000|
|Corporation tax at 20%||£2,200|
|Total tax credit (11,000-2,200)||£8,800|
If your company is micro, small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the RDEC scheme for another.
Think you might be due a bit of Research and Development tax relief? If you’re a Crunch client, we can help. Your Client Manager will be able to look into your case and advise on the best next steps.
If you’re not a Crunch client, what are you waiting for? Arrange a free consultation with one of our advisors today.