The government wants to encourage companies to invest in research and development, so it offers additional tax reliefs on the expenditure.
Research and development (R&D) tax credits were introduced for small and medium sized enterprises (SMEs) in 2000 and for large companies in 2002. R&D credits are a corporation tax relief to encourage innovation and enterprise within the UK economy.
Small and medium-sized enterprises (SME) can claim SME R&D tax deductions totalling 230% of any qualifying R&D expenditure (from 1 April 2015). It is also possible to claim a tax credit if the company is loss making.
It is important to be aware that the rules for claiming R&D tax relief are very generous and that from a tax point of view many business activities can qualify for relief rather than just those involved in very specific scientific type research.
Qualifying R&D certain conditions have to be met in relation to the expenditure:
The following as examples of research activities:
- activities with the aim of obtaining new knowledge;
- searching for, evaluating and selecting applications of research findings and other knowledge;
- searching for alternatives for materials, devices, products, processes, systems or services;
- formulating, designing, evaluating and selecting such possible alternatives. Further detail is provided in the guidelines which state that:
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Even if the advance in science or technology sought by a project is not achieved or not fully realised, R&D still takes place.
a. software or consumables;
b. relevant payments to the subjects of clinical trials;
c. subcontracted R & D costs; or e. externally provided workers.
Staff Costs Staff costs comprise:
l. earnings of whatever nature paid out to the directors or employees other than benefits in kind;
ii. secondary Class 1 NIC paid by the company;
iii. contributions to pension funds paid by the company for the benefit of directors and employees; iv. the compulsory contributions paid by the company in respect of benefits for directors or employees of the company under the social security legislation of an EEA State (other than the United Kingdom) or Switzerland. The staff costs attributable to the project are those paid to or in respect of staff who are directly and actively involved with the R&D project.
If staff are partly involved, an appropriate proportion can be taken. Costs attributable to staff who merely provide support (such as secretarial or administrative support) to those directly involved in the R&D project are excluded. However, if such staff are directly and actively involved in qualifying indirect activities which are specifically identifiable as part of the project activities, the relevant staff costs can be included. Qualifying indirect activities form part of a project without directly contributing to the resolution of scientific or technological uncertainty.
Small companies that haven’t claimed R&D before and have an annual turnover of less than £2 million and less than 50 employees can apply for Advance Assurance. This allows small companies to be able to be sure they can claim R&D tax credits before embarking on significant expenditure. Once accepted, HMRC will allow claims without further enquiries for the first 3 accounting periods of claiming R&D relief.
If you undertaking R&D and have not claimed this relief in the past, please call for more information.