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

Qualifying costs

  • 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)

Key points

  • 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?

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