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R&D Tax Credit Basics – is your company missing out on tax relief?

newsletter-header-2 (1)What You Need To Know:

Since the turn of the millennium, the rise in technological innovation and the continual new development of products is now considered to be part of ‘the norm’. Developments have happened across all sectors but particularly in the manufacturing of electrical goods and information and communication sectors.

What is Research and Development?

Research and Development is defined for tax purposes as a project with the overall objective of an enhancement in a science or technology. The advancement in science or technology must seek to result in an overall improvement in knowledge or capability in a particular field. This can be demonstrated through a tangible means, such as empirical evidence of a product being more energy efficient. On the other hand, a person being able to reflect an improvement in knowledge such as becoming specialised in a certain field would qualify as an intangible means.
Companies who spend on qualifying R&D projects can qualify for enhanced reliefs, tax deductions and potentially a repayable tax credit.

SMEs vs Large Company Scheme:

HMRC have created a two tier system when allocating tax credits for research and development: SMEs or Large Company Scheme. The credits for small or medium sized enterprises are more attractive than large companies and the majority of companies will qualify under SME conditions.

SMEs Conditions:

  • Needs to have fewer than 500 employees and either:
  • Has an annual turnover of more than 100 Million Euros.
  • Has a balance sheet under 86 Million Euros.

The current rate of relief is 230% on allowable R&D costs. This means that whatever costs incurred are wholly and exclusively for the purpose of research and development within a trade, you can multiply it by 2.3 and claim these costs. For instance, if a small business incurred research expenses of £10,000 they could claim £23,000 in allowable expenses, which can be deducted from trading profits.

Alternatively, if a company makes losses during a period where they incur research and development expenses they can claim an R&D cash credit. HMRC will allow you to claim a cash credit by converting your allowable expenditure into a 14.5% tax credit. As such, if you had £10,000 costs of development expenses and sustained a loss then your company would receive £1,450 cash payment from HMRC. The company needs to have paid sufficient PAYE to qualify. On the other hand, you can carry forward any losses to the next accounting period.

If your company is individually small but is part of a larger group structure and would meet these conditions if adjudged to be part of the whole group, then you would receive credits based on the large company rules.

Large Company Conditions :

  • Has more than 500 employees and either has:
  • Has an annual turnover of under 100 Million Euros.
  • Has a balance sheet under 86 Million Euros.

Qualifying Expenditure:

The below table illustrates the allowable costs that can benefit from the enhanced reliefs, normally incurred as part of research and development:

Deduction: HMRC’s Reasoning:
Employee Costs Such costs are a deductible expense under normal corporation taxation rules and are also allowed during the R&D process.
Materials These must be physical and tangible materials used in the process.
Software Intangible materials such as computer software but must be apportioned if only used partly during the R&D process.
Utilities Things such as water, electrical power and fuel are allowable but must be apportioned in respect to usage during R&D.
Subcontractor Costs If an SME and the subcontractor is not a connected party, then you can claim up to 65% of these costs. If you are a large company, then you can only claim on subcontractor costs which directly relate to the research and development.

What Does It Mean For My Company?

The UK Government fully supports R&D with the introduction of the Research and Development tax credit scheme in 2000. According to HMRC, the 14-15 tax year had 22,245 claims with total revenue expenditure at £19.9 billion and £19.6 billion eligible for some form of R&D tax credit; a conversion rate of 98%. Combine this with the ever-changing dynamics of the goods and service markets and it becomes increasingly imperative to have an understanding about how R&D tax credits operate and how it can affect your business.

To ensure that you take advantage of R&D tax credits, contact Wisteria’s tax team on 020 8429 9245.

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