For SME’s, where research and development (R&D) takes place, there is an additional 130% relief that can be claimed on certain costs when computing the company’s taxable profits. This is designed to encourage innovation within the UK.
As an example, say £50,000 of costs during the year, directly relate to R&D activities. Additional tax relief of 130% could be claimed (so a total of 230%) on those costs. With the corporation tax rate being 19%, this brings an additional tax saving of £12,350, an effective tax saving of 24.7%.
The definition of a SME for R&D purposes means having less than 500 employees and either less than €86m turnover or €100m on the balance sheet.
What is R&D?
R&D is a great tax relief available to any UK limited company that has been involved in certain qualifying projects/activities.
Within a R&D claim, HMRC are looking for an overall advance in science or technology that may for example result in; a unique new product/system, a more efficient method of production that results in less waste/cost improvements etc or synchronisation/integration of two different systems. Pure development in itself does not qualify.
HMRC give examples of qualifying activities, these include; software development, engineering design, new construction techniques, bio-energy, cleantech, agri-food and life and health sciences.
There are 4 key questions that HMRC like to see answered within any R&D claim:
- What is the scientific/technological advance being sought?
- What were the scientific/technological uncertainties of the project?
- How where these uncertainties overcome?
- Why was the knowledge being sought not readily available elsewhere?
R&D costs cannot be claimed after the date that the uncertainty is resolved or the work to resolve it ceases.
What R&D costs can my company claim?
You can claim all costs directly relating to the R&D such as staffing costs, subcontractors, suppliers and utilities.
Any subcontract costs can be claimed with only 65% eligible for the additional 130% deduction.
Where employees have been furloughed that would normally contribute to R&D activities, special rules apply to calculate how much of the employee’s overall costs can be claimed. Be very careful of this…HMRC will give it a lot of attention!
What happens if the company has a loss?
Where a company incurs a loss as a result of claiming R&D relief, the company may surrender some of the R&D loss for a tax credit at 14.5%, which is real cash, payable to the company.
We’re here to support you. If you’d like to know more, please do get in touch and our specialist tax team will be happy to help you. You can also download the latest episode of our 2 + 2 podcast, pack with tips and advice for running your business.