HM Revenue and Customs (HMRC) Tax Relief

Research and Development Tax Relief

In his Budget 2014 speech, Chancellor George Osborne announced, "If Britain isn’t leading the world in science and technology and engineering, then we are condemning our country to fall behind." He recognised that investment in cutting edge Science, Technology and Engineering was vital in making the UK more competitive internationally.

He went on to revise the rate of the R&D tax credits for loss- making small businesses from 11% to 14.5%.

R&D Tax Relief Guide

So how does the R&D tax relief work?

HM Revenue and Customs (HMRC) will allow an extra 125% (30% for large companies) of identified costs to be written off against taxable profits. Therefore if R&D expenditure of £100,000 is identified, HMRC will allow £225,000 to be included in the tax computation, giving an extra £125,000 of cost to be offset against taxable profits. The current Corporation Tax rate is circa 20% which equates to a £25,000 reduction in a tax liability.

However, loss making companies are not excluded from the benefits and tax credits can be claimed on the losses enhanced by the R&D expenditure instead of carrying the losses forward to offset against future profits.

To give you an example, if the R&D expenditure is £100,000, HMRC will pretend that a company has spent £225,000 as described above. If a company is loss making, HMRC will allow a company to surrender those £225,000 of losses for a cash payment of up to 14.5% which equates to £32,625.

Essentially loss making companies can claim up to 32.63p in every pound spent on qualifying R&D expenditure.

So what expenditure does it relate to?

Identifying the costs associated with the R&D activity is often seen as a laborious and minimally beneficial process when the cost of gathering the information is compared to the tax benefit. In reality, HMRC encourage a pragmatic approach to gathering cost information. The expenditures allowed as part of the claim fall into four key categories: staff costs, consumables, subcontract labour and heat and power costs.

The opportunity?

R&D tax relief and tax credits are still among the most under-claimed tax incentives currently available.

The main reason behind the widespread failure of companies to take advantage of the reliefs is the misconception of what actually constitutes ‘Research and Development’ for the purposes of the HMRC legislation. Most company Finance Directors mistakenly believe that unless a scientist (operating in a secret laboratory and dressed in a white lab coat) is employed by the company, then R&D is not taking place. Indeed, a cursory glance at the current R&D legislation would undoubtedly suggest that this is a reasonable assumption to make.

R&D activity does not have to be ‘blue sky’ innovation, nor does it have to consist of creating new technologies. Instead, appreciable improvements to existing technology which would be regarded to be ‘difficult’ by those considered competent in the field (company employees for example) are perfectly acceptable where the R&D legislation is concerned.

The potential scope for successful R&D claims across your client base may well be greater than you may think. Below is a list of the business sectors within which we are already making successful claims.

So our advice would be to go through this list and identify your clients that fall into any of these industries:

• Aerospace & Defence
• Alarms & CCTV
• Automobiles & Parts
• Banking and Finance
• Chemicals, Paints and Adhesives
• Clothing, Textiles & Fabrics
• Construction & Building Materials
• Electronic & Electrical
• Engineering & Machinery
• Food & Drink Producers and Processors
• Foundries
• Games Software Industry
• Retailers
• Health
• Household Goods & Textiles
• IT Hardware
• Insurance Brokers (Software development)
• Land Remediation
• Lighting
• Marine
• Manufacturing
• Media & Entertainment
• Personal Care, Cosmetics & Household
• Pharmaceuticals & Biotechnology
• Printing & Packaging
• Property & Construction
• Software Development
• Telecommunications
• Travel Industry
• Transport
• Waste Recycling
• Water Treatment

How far can a company go back?

Retrospective claims can be made for the past two accounting periods which can often result in a significant repayment of corporation tax, or if a company is loss making, a claim for R&D tax credits. It is therefore important to discover whether a claim can be made as soon as possible so as not to miss out due to time limits.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.