Research and Development Tax Relief
General
The U.K. Government is serious about assisting companies obtain tax relief for Research and Development. Although the program has been in existence since 2000, many companies are unaware of the program, and many of those that are aware do not maximize their R&D tax relief claims. Both small and large corporations are eligible to claim R&D tax relief. HM Revenue & Customs administers the program and claims are made through corporate tax returns.
What is the definition of R&D under the tax relief program?
The first thing to understand is that program supports companies that develop or improve products or processes. The underlying technology does not have to be unique or the first of its kind. What qualifies is what we like to call "shop floor R&D".
Specifically, the criteria that must be met are as follows:
1. The technology being developed must constitute a technological advance in a particular field of science.
2. There must be technological uncertainty which must be resolved to achieve the advance.
3. The technology being developed must be carried out by competent and qualified individuals in a systematic manner.
While the above criteria are general, and sometimes difficult to apply in practice, the specific R&D projects that qualify are wide-ranging. The types of industries include, but are not limited to:
1. Manufacturing including: auto parts, plastics, aerospace, chemicals, robotics and tool & die.
2. Software and IT Development
3. Food and Beverage
4. Pharmaceuticals
5. Telecommunications
What are the eligible expenditures under the R&D tax relief program?
The following are examples of the types of expenditures that qualify:
1. Labour, including employees on payroll, amounts paid to staff providers and contractors.
2. Materials consumed or transformed.
3. Power, water and fuel.
4. Computer software.
There are special rules to determine eligibility with respect to each of the above categories of eligible expenditures.
What is the benefit to a company under the R&D tax relief program?
Essentially there are two schemes under the tax relief program. One scheme is for small and medium sized enterprises (SME) and the second scheme is for large corporations.
Generally speaking, an SME is a company with:
1. Fewer than 250 employees.
2. Annual turnover less than €50 million.
3. Total assets on the balance sheet totalling less then €43 million.
Where an SME is a part of a related group of companies, the combined employees, turnover and assets must be combined for the associated group.
A large company is one that does not meet the definition of an SME.
SME
1 - Deduct 150% of qualifying R&D expenditures
or
2 - Tax credit 24% of qualifying expenditures or 16% of gross R&D expenditures (i.e. including the 50% uplift, subject to restrictions)
Large Companies
3 - Deduct 125% of qualified expenditures
Note: All companies may claim 100% of qualifying R&D capital under the R&D Allowance Scheme
Example
A company spends £100,000 on qualifying R&D expenditures:
| SME | Large Company | |
| Incremental amount deductible (up-lift) | £ 50,000 | £ 25,000 |
| Resultant saving (if in a taxable position, assuming 30% tax bracket) | £ 15,000 | £ 7,500 |
| Or | ||
| Tax credit – 24% of £100,000 or 16% of £150,000 (if in a tax loss position) | £ 24,000 | N/A |