If you’re the owner of a small to medium-sized enterprise (SME), or indeed a much larger company, you may be able to receive Research and Development Relief to reduce your Corporation Tax (CT) when undertaking qualifying revenue expenditure in an Research and Development (R&D) project that’s related to your company or organisation’s trade, or a trade that you’re looking to expand into.
Many conditions must be met by your R&D project for you to qualify for this relief, all of which are outlined in the ‘criteria’ section below. Please note that your company must already be paying Corporation Tax for you to claim R&D Relief.
The criteria for SMEs to claim enhanced tax deduction for qualifying expenditure in research and development is very specific to the R&D project in question. From August 2008, for R&D purposes, an SME is deemed to be a company or organisation with less than five-hundred employees, and either:
- an annual turnover not exceeding €100 million (euros, not GBP)
- a balance sheet not exceeding €86 million (euros)
Your SME must fall under this criteria under all circumstances: If your company is part of a much larger enterprise and, therefore, has a staff of over five-hundred people or a greater turnover than the number shown, you would not be considered to be an SME for R&D purposes. This may also occur if your company holds a share of a company (or another company holds a share of your company) that’s greater than 25%.
The SME Scheme
From 1 April 2012 the rate of Corporation Tax relief on qualifying R&D expenditure is 225%, meaning for every £1,000 you spend on R&D, you’ll receive a £1,250 reduction on the income in which you pay Corporation Tax. For SMEs this figure may also be included as a payable tax credit paid directly by HMRC in certain circumstances.
Refund Available If You Make a Loss
If your company makes a loss during a tax year in which you’re claiming R&D Relief you may choose to receive tax credits rather than Corporation Tax relief, so long as you have PAYE and National Insurance Contributions (NIC) liabilities during this same tax year.
Unfortunately any R&D Relief you apply for can only be linked to revenue expenditure; not anything spent on capital assets.
Revenue expenditure includes costs that mount up in the day-to-day running of your business, rather than one-time asset costs. It should be noted that it is possible for you to gain relief for R&D capital expenditure under your Research and Development Allowance if any revenue expenditure is capitalised in your accounts, potentially allowing it to qualify for R&D Relief.
Treatment of Large Companies vs. SMEs
With regard to R&D Relief, HMRC define a large company as any business or organisation that doesn’t fit the criteria laid down for an SME in the ‘criteria’ section above (eg. any company with over five-hundred employees, an annual turnover exceeding €100 million, etc).
The Large Company Scheme
Unlike companies that fall under the SME scheme, for larger companies R&D Relief may only be received as CT relief, not as a payable tax credit, and the tax relief itself is severely reduced; from 225% for SMEs to 130% for large companies; meaning for each £1,000 a large company spends on research and development, they’ll receive a £300 reduction on the income in which they pay Corporation Tax.
If a large company trades at a loss in the year in which R&D Relief is sought, their corporation tax relief percentage will be increased by a further 30% for any qualifying R&D expenditure, with your accountant being allowed to carry this loss forwards or backwards on your behalf in their standard way.
Only certain R&D projects will qualify for Corporation Tax Relief, regardless of whether you’re running an SME or large organisation.
As was touched upon in the opening paragraph, your R&D project must be related to your company or organisation’s trade, or a trade that you’re looking to expand into if the results of your R&D appear encouraging.
Taken directly from HMRC:
Your company or organisation can only claim for R&D Relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty — and not simply an advance in its own state of knowledge or capability.
There are other conditions you’ll have to give some serious thought to with regard to your R&D project, such as the exact costs you’ll be able to claim for and whether, if you’re an SME, you’ll be able to receive tax credits in lieu of CT Relief.
To increase the chance of your project qualifying for R&D Corporation Tax Relief, ask yourself the following questions and include your answers when submitting your Company Tax Return. These questions have been taken directly from HMRC; click here for detailed explanations of each:
- What is the scientific or technological advance?
- What were the scientific or technological uncertainties involved in the project?
- How and when were the uncertainties actually overcome?
- Why was the knowledge being sought not readily deducible by a competent professional?
Understanding Research and Development Relief
To speak with a professional to discuss whether your business can apply for R&D Relief, and for help during your application process, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.