Wisteria Accountants

R&D tax credits are a government tax incentive that businesses can obtain from their spending on research and development projects, which can exceed the actual expenditure. There are two different levels of relief dependent on the size and activity of the company. A company is only able to claim R&D tax credits if they are liable to pay Corporation Tax. In addition, for R&D expenditure to qualify the value of spending must be in excess of £10,000., although there are proposals to remove this limit.

The first type of tax relief that companies can get on research and development spending is for small and medium-sized companies, also known as the SME Scheme. HMRC qualify a company as an SME if they have less than 500 employees and either annual turnover not exceeding €100 million, or a balance sheet not exceeding €86 million. A company that meets these conditions is eligible to claim relief against allowable R&D costs. From 1^st April 2011, tax relief of 200% on qualifying R&D expenditure is available, as long as the amount is greater than £10,000. This rate was previously 175%, and is proposed to be increased to 225% as of April 2012. It is important to note that subcontracted SMEs are subject to different levels of relief, outlined below.

Alternatively, a company of a size exceeding the classification of an SME may claim under the Large Company Scheme. Similarly to the SME scheme, tax relief is only available on R&D spending in excess of £10,000. However, with the Large Company Scheme the level of relief is at the lower level of 130%. Under this system, in addition to claiming their direct expenditure on research and development, a company is able to claim costs of projects that have been subcontracted to third parties. As long as the spending is relevant to the company, the subcontracted work can be completed by a variety of parties, for example a smaller company, or a university. If this work is completed by an SME, they are also able to claim relief against qualifying expenditure; however this can only be at the lower rate of 130%.

Projects that would be eligible to receive tax relief are those that look to contribute to advancements within a technological or scientific field. In order to claim, the research must be related to the company’s industry or an industry that the company is considering entering. In addition, the company must own any intellectual property rights that relate to the results of the R&D expenditure.

Any claims for R&D tax credits are made in the Company Tax Return. It is encouraged for the company to state why they believe they are eligible for the relief, and summarise their calculations with regards to expenditure. The tax credit will be received either in the form of a reduced amount of taxable profit, or in some cases a tax repayment where the business is making a loss.

If you have any further questions on R&D Tax Credits, please call one of Wisteria’s tax experts on 0208 952 0140.