Some FAQ’s about Research and Development Tax Credits
Who can claim R&D Tax Credits?
- It is a tax relief for companies only.
- The relief can reduce the company’s tax charge, create losses for future use, or sometimes create a tax repayment.
- It is based on the company’s expenditure on qualifying Research and Development.
What is qualifying R&D?
- R&D is defined in SSAP 13 and IAS 38 for accounts purposes, and in the 2004 DTI Guidelines for tax purposes: http://www.bis.gov.uk/policies/innovation/business-support/rd-tax-credits/tax-guidelines
- Projects which seek to achieve an advance in science or technology, or activities which directly contribute to advances by resolving scientific or technological uncertainty. This includes certain qualifying indirect activities.
- The advance must be in overall knowledge or capability, not just the company’s own
- The outcome can be tangible (new products or processes) or intangible (knowledge or cost improvements).
- Abortive projects can qualify.
- Patents and other copyright material or processes are helpful in the outcome, but not essential.
How do you claim R&D Tax Credits?
- On the company’s CT600 Tax Return, with supporting documentation in the tax computations.
- The claim can be submitted up to two years from the end of the accounting period.
- Minimum qualifying expenditure of £10,000 per 12 months, pro-rated for short periods (proposed to abolish the de minimis from 1 April 2012).
- There are different rules for small and large companies (groups). Small companies (or groups) have less than 500 employees and a turnover of less that €100 million or gross assets of less than €86 million.
- For small and medium sized companies from 1 April 2011 the relief is 200% of the qualifying expenditure, so for a company paying tax at 20% the saving is 40% of the cost of the R&D. Previously the relief was 175% of the R&D spend and from 1 April 2012 it is proposed to increase the relief to 225% of the R&D spend.
- Small companies can surrender any unrelieved trading losses arising as a result of the R&D claim in exchange for a cash payment. The payment is 12.5% of the loss surrender, but capped at the company’s total PAYE and NIC liabilities for the accounting period. From 1 April 2012 the payment is 11% of the loss surrender.
- Small companies can claim R&D relief on subcontract work for large companies, but cannot surrender any losses for a tax repayment. The relief is given under the large company scheme relief of 130% of the qualifying expenditure.
- Large companies can claim R&D relief of 130% of the qualifying expenditure. This includes subcontract work to small companies, charities, universities and other qualifying bodies.
- Large companies cannot surrender losses for a tax repayment
- Employee costs of employees directly involved in R&D (not consultants)
- Agency staff directly involved in R&D
- Direct materials and consumables
- Utilities – fuel, power, water
- Software used directly in the R&D
- Subcontracted R&D expenditure (special rules)
- R&D Capital Allowances are available for capital expenditure (part of the Capital Allowances rules, not part of the enhanced R&D Tax Credit)
- The need for good record keeping establishing people, time spent and the associated costs.
- The need to be able demonstrate that the time and costs were spent on qualifying R&D – back of envelope calculations are not good enough.
- The need to meet the criteria for qualifying projects.
- Special rules where subsidies or grants are received in respect of the R&D costs – they need to be watched.
- Cost benefit analysis – is it going to cost more in time and effort to put the claim together than you are going to get back in tax saved?