Research & Development (R&D) - Tax Breaks
Over the months and year we have had a few questions about R&D and how you may be able to save tax for the business. So as promised we will expand a bit more on it today
The government has committed to investing £22 billion in R&D by 2025 and this was again confirmed in the 2021 budget. The UK is recognised as a world leader when it comes to research and innovations and our government is looking to maintain this leadership and grow it even further after the Covid crisis and Brexit.
Having worked well for electric cars the aim is for the UK is to remain at the forefront of global innovation by making investment in R&D very attractive when it comes to tax.
What is R&D relief?
There are two R&D schemes available, one for larger companies and a more generous one for smaller companies. Both schemes work in a similar way in that you claim for enhanced tax relief on expenditure directly relating to projects which seek to advance scientific or technological understanding in the respective field.
The advancement could be something completely new or it might be using existing technology in a completely new way. Companies can even claim for projects seeking an advancement, but which end up not working out, as it still advances understanding.
SME R&D relief
The small and medium sized company scheme allows companies to claim tax relief at 230% on qualifying expenditure. This will normally be mainly staff costs, including employers NI and Pension contributions but often also includes material costs, an element of subcontracted fees, software costs and power etc.
The saving will be the corporation tax relief at 19% on the additional 130% of the qualifying expenditure. So for every £100 spent, you will save an additional £24.70 in tax on top of the £19 relief you would normally receive.
That is a total of £43.70 in tax relief per £100 of qualifying expenditure. Well worth a conversation with your accountant!
SME R&D Credit
If the SME R&D relief claim creates a tax loss, the company can opt to claim the SME R&D tax credit. This is by affectively selling the loss back to HMRC for 14.5% of the loss.
Before claiming the R&D credit, you should look to use the loss against any taxable profits normally in the previous year. Currently, under the Coronavirus loss rules, you can carry losses back three years, ensuring you get tax refunded at 19%.
If you do not have enough profits available to use up all the R&D loss, the R&D credit will help to speed up receiving cash from HMRC, all be it at the lower rate.
RDEC large company scheme
The Research and Development Expenditure Credit (RDEC) is available to all companies and currently allows companies to claim a tax credit of 13% for expenditure incurred from 1 April 2020 (12% for expenditure incurred prior to this).
In this case for every £100 of qualifying expenditure, the company would receive a credit of £13 in addition to £19 tax relief, so a total tax break of £32.
SME’s only use this scheme for projects which do not qualify for the more generous SME relief. This might be for projects where the SME is subcontracted to undertake the R&D work by larger companies or where other government grants have been received for the project.
New Cap on the SME R&D Credit
Unfortunately, there has been some abuse of the SME R&D credit scheme and so government has had to introduce a cap of the amount of SME R&D tax credit companies can claim.
The cap is £20,000 plus three times the total PAYE and NIC liability of the company for the year. As in most cases most of the claim is made up of employee costs, this cap should not affect many legitimate claims.
This cap does not affect the SME R&D relief or the RDEC credit.
How do I know if am carrying out R&D Work?
When you can demonstrate that you are making advancements in the field in which you operate, not just within your company, you may be able to qualify for R&D tax relief.
When I first mention this relief to clients, they often say they don’t have any R&D, although this is often because they are thinking about white lab coats and test tubes! After explaining the relief in a bit more detail there are often projects which would qualify.
Recently, I have worked on several claims in software development and programming, new industrywide standard setting and projects expanding knowledge in the field precision engineering as well as creating new products or developing new processes.
It is well worth discussing anything you think might be new, innovative or which gives you a competitive edge, with a professional as it might qualify and you don’t want to miss out!
What do you need to do?
To claim the relief, in either case, the company needs to prepare a report explaining the project, demonstrating how it is seeking an advancement in the relevant field, along with a summary of the costs being claimed.
This might sound daunting; however we can help guide you through what projects would qualify, what expenditure to include in the claim, help produce the report for you and submit the claim to HMRC for your
This is a great relief which the government are seemingly looking to back strongly. It is well worth a discussion with your accountant or us to see if there are any projects you have undertaken which qualify or to simply understand where any future projects might qualify.
If you would like to explore this R&D tax credits further and see if your business can benefit from it please email the author of this blog and our in-house expert on this subject Ian Meaburn directly at Ian.Meaburn@myersclark.co.uk