Research and development (R&D) by UK companies is actively encouraged by Government through a range of tax incentives which continually improves year on year. Qualifying capital expenditure attracts an upfront 100% deduction under capital allowances but the R&D relief schemes focus on qualifying revenue expenditure and are only available to companies.
There are two schemes, one for large companies and one for ‘small and medium sized enterprise’ (SME) companies. Both schemes now provide two main elements of relief:
- An increased deduction for R&D revenue spending
- A payable R&D tax credits for companies not in profit.
This article focuses on the SME scheme only.
The SME scheme
The R&D revenue relief increases the amount a company can obtain tax relief on from the normal 100% revenue deduction to 225%. If the impact of this revenue deduction is that the company incurs a loss which it cannot relieve until a future period then it can be converted into the repayable tax credit. Budget 2014 announced that the rate of converting such a loss into a repayable credit would increase from 11% to 14.5%. This applies to qualifying expenditure incurred on or after 1 April 2014 onwards.
The SME relief in operation
Challenge Ltd is an SME and incurs qualifying R&D expenditure during the year to 31 March 2014 of £120,000.
- If Challenge LTD is profitable it will be able to claim a deduction in respect of this R&D expenditure of £270,000 which will reduce its corporation tax liability by £54,000 (assuming a 20% rate), giving the company effective relief on the actual expenditure of 45%.
- If, on the other hand, Challenge Ltd makes a loss of £270,000 (all attributable to the R&D expenditure) which would otherwise be carried forward for relief against the future trading profits then it can be converted into a payable R&D tax credit. The revised rate of conversion of 14.5% would generate a payment to the company of £39,150 (£270,000 x 14.5%) which equates to approximately 33% of the original expenditure.
Some key conditions
To obtain SME R&D relief the first essential matter to determine is whether HMRC would accept that the particular activities constitute R&D. The second is making sure the relevant tax rule conditions are met, the most important being:
- The expenditure must be from a qualifying revenue category and not be capital expenditure
- The spending must not be incurred in carrying out activities contracted to the company by another person (however a slightly different from of R&D tax credit may apply)
- The expenditure must not have been met by another person (if the R&D project is funded in whole or part by ‘State aid’ such as a government grant, none of the spending on that project can qualify for R&D tax credits).
R&D does not however have to be undertaken in the UK.
If this I something that you would like to discuss in more detail, please get in touch.