Tag Archives: Research and Development Tax Credit

Obtaining your research and development tax relief

Obtaining your research and development tax relief 

Obtaining your research and development tax relief to maximise your profits is crucial in the current environment.

The government views investment in research and development (‘R&D’) as a key to economic success. It is therefore committed to encouraging more  smaller and medium sized (‘SME’) companies to claim R&D tax relief. Claims by SMEs for enhanced tax deductions have  more than doubled over the last five years and claims for cash repayments have increased by 126% in 2013/14 from 2012/13.

The recently published government plan to improve access to R&D highlights the need for more SME companies to understand what relief is available and how the process of claiming tax relief works. Recent changes to R&D scheme rates have increased the relief available so a clear understanding is needed to ensure that companies are aware of how the tax rules work.

In order to help remedy the position they have therefore introduced:

  1. A Voluntary Advanced Assurance scheme for small businesses making their first claim is being introduced from November 2015. Successful applicants will receive assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.
  2. Bespoke guidance aimed at smaller companies and more direct communication between HMRC and companies that are already claiming, or thinking about claiming, R&D tax relief

What is Research and Development for Tax Purposes?

In order to obtain Research and Development there needs to be 3 key  conditions which need to be met:

  1. The project must be a qualifying project; and
  2. There must be relevant R & D activities; and
  3. The expenditure must be qualifying expenditure

If the above conditions are met there is the opportunity to obtain additional tax relief on the expenditure.

What tax relief can I claim?

A company can claim enhanced deductions against its taxable profits for expenditure which is qualifying R&D expenditure. The amount of the enhancement has increased over the years. The rate was 125% for expenditure incurred before 31 March 2015 and has increased to 130% from 1 April 2015. This amount is in addition to the actual expenditure (ie a 230% total deduction from 1April 2015). R&D enhanced relief represents an additional corporation tax reduction of 26% of the expenditure incurred.

If the R&D claim creates a tax loss, then the company may be able to surrender the loss for a cash repayment. This is 14.5% for expenditure incurred on or after April 2014. A surrendered loss could therefore give a repayment of up to 33.35% of the expenditure.

Where the company incurs qualifying R&D expenditure before it starts to trade, it can elect to treat 230% of that expenditure as a trading loss for that pre-trading period. The pre-trading loss created by the R&D relief can then be surrendered, as above, which could which could provide much needed cash flow for new companies.

On certain projects R&D relief under the SME scheme is not available if the R&D project has had the benefit of a grant or subsidy. There may, however, be an alternative claim available to the company. This is known as the Research and Development Expenditure Credit scheme (RDEC). RDEC allows the SME to claim a taxable credit of 11% of eligible expenditure. As this amount is taxable it is known as an ‘above the line’ credit. This 11% rate is for expenditure incurred on or after 1 April 2015. Prior to that date the rate was 10%.

The credit received is used to settle corporation tax liabilities of the current, future or prior periods subject to certain limitations and calculations. Where there is no corporation tax due the amount can be used to settle other tax debts or can be repaid net of tax.

The RDEC relief is also available to an SME for expenditure incurred on R&D that is contracted to it by a large company.

In order to maximise the potential of obtaining this beneficial relief it is crucial that you seek professional advice in order to maximise the opportunity of achieving the relief. Our tax specialists have considerable experience in this area and they can help you obtain the relief.  If you need further advice please contact us.