Research and development tax relief
Relief for qualifying revenue expenditure is as follows:
|SME enhanced deduction scheme||130%||130%||A|
|SME cash credit for R&D loss surrendered||14.50%||14.50%||B|
|Large company above the line scheme credit||13%||12%||C|
A Additional (enhanced) tax deduction available for qualifying R&D expenditure
B From 1 April 2020, the payable R&D tax credit in any tax year is restricted to three times the company's total PAYE and NIC liability for that year.
C Taxable credit available on qualifying R&D expenditure.
EU definition of small and medium sized companies for R&D tax relief purposes
|Since 1 August 2008||Before 1 August 2008|
|Turnover||≤€100 million||≤€50 million|
|Balance sheet assets||≤€86 million||≤€43 million|
A deduction from corporation tax profits is available to companies conducting research and development (R&D). The tax benefit is only available to organisations liable to corporation tax, and therefore excludes partnerships.
The tax relief
The tax relief is provided by increasing the amount that is deducted from taxable profits. For Small and Medium Enterprises (SMEs), the deduction is increased from 100% to 230%, and for large companies from 100% to 130%. As an example, a small company that incurs £10,000 on research may deduct £23,000 from its tax adjusted profits.
R&D tax relief is not available to subcontractors. As an exception, where a small company subcontracts work from a large company, it may claim the large company tax relief (of 130 %.)
Research and development
A project will be eligible for research and development tax relief that resolves a scientific or technological uncertainty, through achieving an advance in overall knowledge and capability. A project that merely brings about advancement in the organisation's own capability would not be sufficient.
An abortive project that intended to achieve an advance in science and technology, but did not resolve it to the extent intended will also be eligible for the tax relief.
Qualifying research and development costs include the cost of staff, software, consumable items, premises costs and broadly any costs used directly in the research.
Research and development includes qualifying indirect activity, such as IT, personnel, finance and administration related to the project. The general overheads of an organisation would not be research.
In general, a large company cannot obtain R&D tax relief for the cost of subcontractors on the project. Where an SME subcontracts part of the project to an unconnected third party, only 65% of the payments to the subcontractor will be eligible for the enhanced tax relief. Where the subcontractor is connected, 100% of the payment will be eligible for tax relief. However, the any payments greater than the relevant cost incurred by the subcontractor are ignored. Two companies are connected where one controls the other, or both are under the common control of the same person. Two unconnected contractors may jointly elect for the connected party rules to apply.
Companies, of all sizes, can only claim a deduction from taxable profits of 100 per cent of R&D outlay which is capital in nature. Capital items would include computer hardware, research equipment and cars used by research staff. The cost of land and property used for the project would not qualify for research and development tax relief.
Expenditure for which state aid is received is excluded. Given that SMEs obtain a deduction from profits more than double the expenditure incurred there may be a tax benefit to foregoing the grant or subsidy available. Notwithstanding, the cash flow implications of grant should be considered, especially where the company is expected to be losses making.
If a company, of any size, makes a loss, the allowable loss for corporation tax purposes is increased by any R&D tax relief.
Where a SME has been loss making, it may claim a tax credit, instead of the tax relief. Large companies cannot claim R&D tax credits.
From 1 April 2014, the tax credit is 14.5% of the 'surrenderable loss'. The surrenderable loss is the lower of the trading loss and 230% of the qualifying R&D expenditure. The amount of loss which has been surrendered for tax credit cannot reduce taxable profits in a different accounting period.
The R&D tax credit is offset against any corporation tax liability, or to the extent that there is no tax liability, will be paid by HMRC. An R&D tax credit received from HMRC is not taxable income. It may be possible to shorten an accounting period to bring forward the date of such a payment from HMRC.