Research and Development tax relief for small or medium sized enterprises
What is R&D Tax Relief or Corporation Tax (CT) Relief?
The UK government, in 2000, introduced a system to support technological and scientific innovation for the small and medium sized companies in and around the UK. The introduced Research and Development tax relief for Small or Medium sized Enterprises is a Corporation Tax (CT) tax relief that aims to reduce a company’s tax bill if a business or organisation is legally responsible for Corporation Tax. The Research and Development Expenditure Credit (RDEC) format was established in the Finance Act 2013 and facilitates businesses or organisations with no Corporation Tax liability to take advantage either through a reduction of tax or other duties due. The R&D Tax Scheme was intended, by the UK government, as an enticement to support businesses to invest into R&D which was needed for their business activities. This scheme aims at gratifying innovative thinking within the UK SME’s business i.e. look for new and creative products.
Projects considered under R&D
For you to claim the R&D relief on your Corporation Tax, your project must pass the norms set by the government, which makes it a Research and Development project. The project must contribute to advancement in the field of science or technology and not a theoretical field or something related to social sciences. Once again, it must be related to your field of operation. If your project relates with or develops a new process, product or service or improves an existing one, then you need to explain the following four things about your project, and you can then, easily qualify to claim the R&D relief. You need to ensure here that the project that you worked on went on to:
- Explain how your project contributed to some advancement in your field: What you need to take care of here is that your explanation needs to show how the contribution of your project was in your entire field of work and not just your own personal business. This means that a publically known technology if used for the first time in your sector, is not considered an R&D process. However, a technology developed by some company but not known publically can be considered for claiming the R&D relief.
- Explain that what you worked on was something absolutely new, i.e., show the existence of uncertainty: The very reason why a new process or technique is developed is that something similar to that, to benefit your field of work, doesn’t already exist. You need to show how none of your company experts were aware of this development or the way it was achieved before you developed it.
- Explain how you defeated uncertainty or at least tried to: This can include a general description of the failures and successes of your project and how it overcame the failures that it encountered if it did any. Explain how your project was involved in research, analysis, and testing and vividly describe how you overcame the problems that came your way.
- Show that no expert or a professional in the concerned field could solve the instigating problem: You need to be able to explain why you started the R&D project in the first place. Explain why a professional couldn’t work out a solution and what all problems you faced while looking for a solution before moving towards an R&D project.
If you manage to successfully explain the above four points and convince the government of the need and the contribution of your Research and Development project, you can claim the R&D relief on your Corporation tax.
Type of R&D Reliefs
There are primarily two types of R&D Relief based on your company size and whether or not your project has been sub-contracted to you.
Small and Medium Sized Enterprise (SME) R&D Relief
If you are an SME, i.e., a small or a medium-sized enterprise, with less than 500 employees and a turnover of a maximum of €100m or a balance sheet total of less than €86m, you can claim the SME R&D Relief.
What if offers? This relief allows a company to do the following:
- Deduct 130% of their qualifying costs from their yearly profit over and above the normal 100% deduction, making a total of 230% deduction of their qualifying costs.
- Claim a tax credit if the company is running in losses, worth a maximum of 14.5% of the surrenderable loss
Research and Development Expenditure Credit
If you are a large company and want to claim an R&D relief, then this is the relief for you. It can also be claimed by SMEs and large companies, sub-contracted to do the R&D work by a larger company.
What if offers? The RDEC offers you a tax credit for 11% of your qualifying costs on the R&D project.
R&D tax relief for SMEs
Who can claim?
As mentioned earlier, if you are an SME, with less than 500 employees and a turnover of a maximum of €100m or a balance sheet total of a maximum of €86m, you can claim the SME R&D Relief. It needs to be noted that you need to consider the figures of linked and partner companies while calculating if you are an SME.
- Linked Company: Your Company is linked if it holds over 50% of the voting right in any other company or vice versa. In such a case, the staff number, the balance sheet, and turnover values should be included in your total.
- Partner Companies: A company is your partner company if it holds over 25% of your company’s voting rights or capital or vice versa. In such a case, the proportion of staff, turnover and balance sheet figures to be included in your total depends on the percentage of voting rights and capital that is shared between the companies.
R&D tax relief and benefits
A business is only eligible to claim under the SME scheme if the company or organisation meets the definition of a small and medium sized enterprise (SME) for the purpose of R&D tax relief. However, in some explicit situations, even if a business or company meets the requirement or definition of a SME, it may still not be able to claim relief under the SME Scheme. This means, if a business is a SME, it might be able to claim R&D tax relief under the SME Scheme for one project and the other under the Large Company Scheme
As a result of a flourishing R&D tax claim, there are innumerable benefits for a business. A lot of businesses often use the amount from R&D relief to pay tax bills or any other debts associated with the business, thereby, easing cash flow pressure. In addition to this, the money received from R&D tax relief can further to used to fund the launch of new services and products. Starting 1 April 2015, this scheme has higher rates of relief and permissible R&D cost is 230%. This implies that for each £100 which is corresponding to the qualifying costs, an organisation can decrease their corporation tax by an additional £130 over and above the £100 spent
How and when can an SME apply for R&D tax relief
While submitting a corporation tax return, a business must check (put ‘X’) for box 99 which is for SMEs, and the improved expenditure in box 101. However, DNS Accountants recommend that businesses should interact with members from their learned and experienced team to seek guidance and advice on making a claim. This will help the businesses to make certain that every section of the define criteria is met, and the actual spending amount corresponding to R&D can be claimed back
Businesses will be required to notify HM Revenue and Customs (HMRC) and explain them the reason for a particular R&D activity to qualify for a tax relief. Usually, there is a time range within which a business must make sure that they have filed for a relief – this period is 2 years subsequent to the end of the tax return accounting period. If a business thinks that it qualifies for a R&D tax claim, it is imperative to produce adequate records of project in case HMRC demands for them. By doing so, businesses can make sure that they have applied for the tax relief and are likely to qualify for the claim
Costs You Can Claim for R&D Project
Certain costs which you incur over the period of the R&D project, from the date you start working on it till you discover the advance or till the project is stopped, can be claimed through the R&D relief. Even if your project fails, you can still file for a relief. These costs include:
- Staff Costs: For all the administrative or support staff working directly on the project, you can claim a proportion of their salaries, wages, pension fund contributions and class 1NICs. Remember, however, that you cannot claim for the clerical or maintenance work.
- Subcontractor Costs: If you use a sub-contractor for your project, you can claim 65% of those costs.
- Consumable Items: You can claim for all the materials and utilities consumed in the R&D.
It is essential to know what all costs you can’t claim through the R&D project, and these include the costs incurred for the production and distribution of goods and services, cost of land, rents, cost of patents and trademarks and capital expenditure.
Work out when your project starts and ends
It is essential to know when your R&D project begins and ends simply because you need to know what all costs were incurred during this period so that you can file a claim for them.
Your project starts the day you begin to resolve the uncertainty, the problem whose technical solution isn’t yet available. It ends the day you get a solution to your uncertainty or the day you stop working on the project. Post this ending date; you should have a working solution for the uncertainty which should be final enough to enter the production process. Your project might restart if you come across a subsequent scientific or technological uncertainty.
How to Claim Research and Development Tax Relief?
An Research and Development Tax Relief can be claimed within two years of the end of the accounting period that it relates to. It can be filed by entering all your enhanced expenditure in the ‘full company tax return form- CT600.’
For calculating your enhanced expenditure, you need to do the following:
- Calculate the costs directly incurred during the R&D period
- Reduce any external staff provider payments to 65% of their original cost.
- Add all the costs together
- Multiply the total cost by 130% to calculate the additional deductions to be put in the tax computations.
- Add this amount to the initial R&D expenditure to get your enhanced expenditure, to be entered on the tax return.
How to support your Research and Development Tax Relief claim?
To add weight to your Research and Development Tax Relief claim, you need to add a summary explaining how your project was advantageous to your field of work, show the existence of uncertainty, explain how you overcame it and why it could not be worked out by a professional. To add to it, it is always a good idea to show a breakdown of the total costs and clearly define all the calculations made.
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