During the 2017 Autumn Budget, the Government outlined a long term vision for investment in UK science and innovation by announcing a £2.3 billion investment in Research & Development.
This investment is intended to contribute towards a Government target of UK Research and Development becoming 2.4% of GDP by 2027.
The announcement means that companies can continue to claim Research & Development tax credits. These tax credits provide generous corporation tax relief to companies who incur qualifying revenue expenditure on Research and Development.
What constitutes as Research and Development?
For tax purposes, HMRC define Research and Development as work on a project that seeks to achieve an advance in a field of science and technology.
The research and development must be relevant to the firm’s trade and companies that incur qualifying revenue expenditure are entitled to claim a corporation tax deduction.
Examples of Qualifying Revenue Expenditure includes (but is not limited to):
- The Costs of Employing Staff who are directly engaged to work on qualifying Research & Development Activities.
- Consumables and Materials that are used in R&D work.
Corporation Tax Deduction
Small and Medium sized enterprises (SME)
Small and Medium sized companies can claim Research and Development tax relief on qualifying revenue expenditure at a rate of 230%.
These companies are defined as those with fewer than 500 employees, having a turnover of not more than €100 million and/or assets of more than €86 million.
If an SME company makes an R&D tax relief claim and is loss making, the company can surrender the tax relief for a repayable tax credit which is equal to 14.5% of the enhanced deduction (or the unrelieved loss if lower).
Large companies (those who are not within the definition of small and medium-sized companies) could claim R&D enhanced deduction of 130% from any taxable profits. This scheme expired on 1 April 2016 and was replaced by the Research and Development Enhanced Credit Scheme (RDEC).
The RDEC scheme provides large companies with a tax credit akin to a grant which can be used to offset corporation tax or certain other liabilities. These companies can claim a payable tax credit of 12% (increased from 11% with effect from 1 January 2018) of the enhanced deduction.
The increase in the tax rate for RDEC companies is the second since the scheme was introduced by the Government in April 2013. This rate increase is particularly prevalent for large companies, as the corporation tax rate has reduced to 19% with effect from 1 April 2017.
This increase in the RDEC rate will enable companies claiming under the RDEC scheme to invest more in qualifying expenditure. This is an encouraging measure although it should be noted that there was a desire from the SME community for their rate to be increased, in order to allow the benefit for tax paying companies to be on a par with the decreasing corporate tax rate.
Please note that the RDEC is a standalone credit that is brought into account as a receipt in calculating taxable profits.
It should be noted that claiming for R&D tax credits can be a difficult and time consuming task, as the legislation and reporting requirements are strenuous.
There are various aspects to an R&D claim that should be considered by prospective claimants:
- Subcontracting Costs
- Going Concern
- Unpaid PAYE/NIC/VAT Liabilities
R&D reports must be submitted to HMRC in the correct format and match specific criteria that is outlined by HMRC guidance. If the report is not in the criteria that is outlined, you are at risk of submitting an inaccurate claim.
What does this mean for you?
According to the statistics released in 2017, there was a 19% increase in the total number of R&D tax credit claims made in the 2015/16 tax year. The advantages of applying for R&D Tax Relief are significant and if you think you are eligible, please contact Campbell Dallas for further assistance.
If you want to discuss any of the points raised in this blog please get in touch with me:
0141 886 6644
The information in this blog should not be regarded as financial advice. This is based on our understanding in January 2018. Laws and tax rules may change in the future.