R&D Tax Credits - Government lifelines for UK businesses

14 October 2015

In the climate of cuts and austerity which followed the global downturn, the UK Government has been working hard to incentivise innovation and to bolster UK businesses by introducing and improving some very significant UK tax breaks.

Many engineering companies invest heavily in research and development (R&D), but do not claim the full tax relief and government funding which has been put in place to help them. These companies are effectively squandering a potentially vital competitive advantage.

For a company with less than 500 employees, a staggering 230% of the cost of R&D can be offset against tax using the R&D tax credit system. Also the Patent Box tax breaks can be used by any company carrying out R&D in the UK to nearly halve its corporation tax bill for sales of patented products.

Funding is also available through Innovation Vouchers to pay for the services of a patent attorney, who can turn R&D into company assets in the form of intellectual property. Not only can that intellectual property be used to keep competitors at bay, and to benefit from tax breaks, but like any other property, it can be licensed, sold, mortgaged or otherwise leveraged to the benefit of the company.

R&D Tax Credits – how can your business benefit?

If your company pays corporation tax in the UK, and carries out R&D, your accounts team may be able to claim R&D tax relief and reduce the company’s tax bill.  In some circumstances a small or medium-sized company could choose to receive a tax credit instead - a cash payment from HM Revenue and Customs (HMRC). The size of your company dictates which tax relief scheme you will benefit from. These schemes are:

  1. The Small or Medium-sized Enterprise (SME) Scheme - maximum claim limit of €7.5 million per project.
  2. The Large Company Scheme - no maximum claim limit

An SME is currently defined for the purposes of R&D tax credits as a company or organisation with fewer than 500 employees, and either an annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million.

For the SME scheme, the tax relief on allowable R&D costs is 230%. What this means in practice is that the cash value of a claim made by an SME paying UK tax could be as much as £24 for every £100 spent on R&D. For the large company scheme the relief is still a very healthy 130%.  Also under the large company scheme, if there is an allowable trading loss, this can be increased by 30% of the qualifying R&D costs and this loss can be carried forwards or back in the normal way.

The key point to note is that your company can only claim R&D tax relief on an R&D project that is related to the company’s trade. Also that project must “seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”.  

When putting forward a project for R&D tax credits, HMRC has suggested a series of questions to be answered when filing your Company Tax Return. These questions, intended to help HMRC appreciate how the definition of R&D applies to the project, are as follows:

  1. What is the scientific or technological advance?
  2. What were the scientific or technological uncertainties involved in the project?
  3. How and when were the uncertainties actually overcome?
  4. Why was the knowledge being sought not readily deducible by a competent professional?

Examples of relevant costs which might qualify under the scheme include employee costs, consumable or transformable materials used directly in carrying out R&D, payments to subjects of clinical trials, power, water, fuel used directly in carrying out R&D, software used directly in the R&D. SMEs can also claim subcontracted R&D expenditure.

Your company accountants may be able to help with your claim, but if not, a growing number of tax specialists are coming into the market to help companies answer these questions and navigate the other requirements of a successful and robust R&D tax credit claim.

 www.haseltinelake.com

Ashley Giles

Partner

Our Expert
Ashley Giles
Ashley Giles
Location: London (UK)

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