1) Research and development (R&D) means there is a brand new product or process at the end of the project – WRONG
2) Research and Development tax relief is only available for successful projects – WRONG
If your company has been engaged in a project that seeks to achieve an advance in science or technology, it is carrying out R&D.
For many SMEs, advances are in technology. An improvement to an existing product or process may be sufficient for a claim.
Is it worth it?
Yes, it’s free money! The relief for SMEs is currently 230%. That means that for every £1 of qualifying expenditure your company makes, it receives an additional £1.30 of relief.
Every £1 spent yields a deduction of £2.30 against taxable profits.
And loss-making companies can claim a repayable tax credit calculated at 14.5%.
For example, a company has a trading loss of £100,000 and qualifying R&D expenditure of £35,000. The surrenderable loss is the lower of £100,000 and £35,000 x 230% = £80,500.
The tax credit will therefore be 14.5% x £80,500 equals £11,672.
PAYE cap on payable tax credits
A restriction was introduced for accounting periods beginning on or after 1st April 2021. The maximum payment that can be claimed is £20,000 plus 300% of a company’s PAYE and NIC liabilities for the period; there are some specific exemptions.
What is needed for a successful claim?
What are the requirements?
- There has to be a project focused on the issue to be resolved
- There has to be an intention to achieve an advance in science or technology
- The project must relate to the company’s trade – an existing one or one it intends to start based on the results of the R&D
- The company has to explain how its project sought to overcome the uncertainty around the advance it wants to achieve
- The issue has to be one that cannot be easily overcome by a professional working in that field
- The process, product or service can still be an advance if it has been developed by another company but isn’t publicly known or available. For instance, there are many companies currently working on both electric cars and driverless cars. They will each be claiming R&D tax relief
- The project can research or develop a new process, product or service, or improve an existing one
SME R&D Relief
A company is defined as a SME if:
- It has less than 500 members of staff
- It has a turnover of under €100m or a balance sheet total under €86m
- Staff costs
- Consumable or transformable items
- Contracted out R&D costs* (65%)
- Externally provided workers (65%)
There are also R&D allowances which allow for full relief for qualifying capital expenditure.
*A further restriction is anticipated for accounting periods beginning on or after 1st April 2023. There will generally be no R&D relief for payments to subcontractors unless their work is undertaken in the UK. For companies that have substantial work carried out by overseas subcontractors, these anticipated rules are likely to prevent meaningful claims in the future.
Time limit – Two years from the end of an accounting period, in line with the corporation tax return deadline.
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