R&D Tax Credits

Over the past few years R&D incentives have been increased as a result of The UK Government recognising the importance of fostering innovation leading to improvements in productivity and competitiveness.

The amount that can be claimed differ for SME’s and larger companies (SME’s being companies with fewer than 500 staff and turnover less than €100m: Approximately £87m). For SME’s the relief is 230% of the expenditure. If loss making then companies can claim a tax credit worth up to 14.5% of the R&D loss For larger companies there is a tax credit for 11% of qualifying R&D expenditure up to 31 December 2017 and 12% from 1 January 2018. It is only available to limited companies, so sole traders and partnerships who expect to incur R&D expenditure might wish to consider incorporating before committing to a project.

So what counts as R&D? The HMRC guidelines are written widely. The expenditure for R&D relief (see later for what is and isn’t eligible) must be part of a specific project to make an advance in science or technology and must be in respect of the company’s existing trade or a new trade arising from the R&D work.

The R&D claim needs to have sought an advance in science or technology, that couldn’t be readily worked out by a professional in the company’s industry or tried to overcome an uncertainty, either successfully or unsuccessfully. The expenditure may have been undertaken to research or develop a new process, product or service or improve on an existing one.

Eligible costs for R&D tax credits include:

• Staff costs, including wages, NIC and pension costs: Where a subcontractor is used 65% can be claimed;
• Consumables such as direct materials and utilities (such as heat and light); and,
• Software licence costs, if used directly in the scheme.

But exclude:

• Production and distribution of goods and services;
• Capital expenditure including land;
• Patents and trademarks; and,
• Rent or rates.

There is no maximum claim and companies can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.

Care needs to be taken when considering what constitutes science and technology. Science for example does not cover behavioural sciences. Traditional marketing does not qualify but if technological projects underpin the marketing then claims are potentially possible. Care is again needed when grants have been claimed as they may block subsequent R&D claims. And finally, salary mistakes can bite in a couple of ways: (1) Start-ups may not be paying salaries to the founders, and so no payment means no claim; and (2) The subcontractor v directly employed rule, can reduce the eligible expenditure by 35%.

R&D claims can be complicated. Companies who are making their first R&D claim can qualify for Advance Assurance. If Advance Assurance is granted, any R&D claims in the first 3 accounting periods will be accepted if they’re in line with what was discussed and agreed. Alternatively, Companies can take advice from their accountant, or an R&D tax specialist.