Research & Development – are you taking advantage of tax relief?
16 July 2018
You may already be well aware of the tax reliefs available for Research and Development (R&D) activities, and you may think that only those who wear white coats are able to claim such relief.
This is simply not true. No industry is excluded from additional relief for R&D activities. Relief is available to companies which conduct activities within the meaning of ‘Research and Development’.
In recent years, Old Mill have helped clients from many different industries obtain R&D relief. Often we are approached to discuss one project that a company has undertaken only to uncover many more which qualify – a very happy surprise to the business owner concerned!
Innovation is the driving force around additional tax relief for R&D activities. The purpose of the relief is to incentivise UK companies to innovate. By the Government’s own admission this is an underutilised relief with many qualifying projects being undertaken without a claim for the additional tax relief.
Common scenarios when R&D is undertaken:
- Creating a new product or process
- Improving a current product or process
- Solving a problem faced with a process
- Reproducing a current product or process in a different manner
Has your company undertaken any of the above? If so, you could claim for additional tax relief!
R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.
An advance can be made through the creation of something new, through a significant improvement or recreating something using fundamentally different concepts. A project must simply seek to make an advance. It is not necessary for the advance to be made at all or even partially, for example where only minor improvements are made having sought substantial improvements. The benchmark for an advance is the knowledge of the industry rather than the companies own state of knowledge. However, if the advance sought has already been made or attempted but details of this are not readily available (eg. a trade secret), this still may be R&D. Broadly speaking, “science” is the study of the nature and behavior of the physical and material universe. “Technology” is the practical application of scientific principles and knowledge.
This is much less restrictive than you would first think! Some examples include:
- Significantly increasing the life of a battery.
- Significantly increasing the efficiency of a process, resulting in cost savings or reduced waste.
- Creation of a new product or process through an increased scientific or technological knowledge.
- Recreating a product or process using different underlying science or technology.
- Greater understanding as to the scientific interaction of ingredients in a food product.
Uncertainty exists where, based on available knowledge, it is not certain whether a project is scientifically possible, technologically feasible or achievable in practical terms. This can also relate to a system as a whole, with the uncertainty of how best to achieve the overall effect desired. Often the uncertainty arises from something already established as possible/feasible, being made into a cost-effective, reliable and reproducible process, material, device, product or service.
Small or medium sized enterprises (SMEs) enjoy a significantly higher rate of relief compared to large companies.
Relief is obtained through an enhancement of ‘qualifying expenditure’ when calculating the taxable profits of the company, subject to Corporation Tax. For every £100 of ‘qualifying expenditure’, a deduction of £230 is achieved through an enhancement of 230%. At the current prevailing rate of 19%, this offers tax relief of £43.70 on £100 of expenditure.
Should an SME find themselves in a loss making position having R&D enhanced expenditure, they are able to surrender losses arising in the period, up to 230% of qualifying expenditure, for a repayable tax credit of 14.5%.
For example, say following the enhancement of £100 (as above) a taxable loss of £1,000 arose, £230 may be surrendered for a repayable tax credit of £33.35. This offers tax relief of £33.35 on £100 of expenditure. The remaining loss of £770 is available to be utilised according to the normal rules.
‘Qualifying expenditure’ is incurred when attributable to the resolution of the uncertainty and fall into one of the following categories:
- Staffing costs (including Employer’s NI and pension contributions)
- Software or consumable items (including water, fuel and power)
- Externally provided workers (subject to restrictions)
- Sub-Contractor payments (subject to restrictions)
Being aware of R&D activities sooner rather than later can greatly increase the potential claim. The possibility of a claim may also feature into other tax strategies being undertaken, such as remuneration planning. We would encourage companies to speak to their usual Old Mill contacts upon commencement or planning of any new activities which may attract R&D relief.