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Research & Development: Small and Medium Enterprises

Broadly speaking, a project qualifies as R&D if it seeks to achieve an ‘advance’ in science or technology and applies even where the advance is not realised or fully achieved. The ‘advance’ might be to improve overall knowledge or capability, or lead to a new or better product/process/system or cost improvements.

R&D can be an expensive venture, although some expenses may qualify for tax relief (see categories below). The rules and tax credit claim process are reasonably complex; you’ll need to identify precisely which expenditure qualifies for R&D tax relief and prepare the necessary calculations and supporting narrative for submission to HMRC. Wise & Co can take care of the entire process for you, liaising with HMRC on your behalf and working with you to maximise the benefits of the claim.

Categories of qualifying expenditure

Staff salaries for staff members ‘directly and actively’ engaged in R&D work. Administration time for report work is expected, so a sensible apportionment e.g. 90%-98% claim is more likely to be accepted by HMRC. Managers/supervisors are included, although more of their time is likely spent on non-technical administration and management reporting, so an apportionment of their time is required.

Consumable items directly employed in the R&D process such as water, fuel and power. The item must be used up or transformed during the R&D process; for example, a laboratory chemical which is used up or converted to an unusable product. Claims under this heading include heat and light attributable to the R&D function. If items are partly employed in direct R&D, a suitable apportionment should be made.

Specific software used in the R&D function. An appropriate apportionment should be made if the software is not solely used for the R&D function.

Subcontractor costs: If R&D work is subcontracted to a third party, the subcontractor must do the work and not subcontract further. The subcontractor does not need to be UK resident nor carry out the work in the UK. A business can generally claim 65% of the payment made to the subcontractor. The treatment of the claim differs if a business is connected to a contractor.

Externally provided workers ‘directly and actively’ engaged in R&D work. A business can claim 65% of the overall cost, but the rules are different if the business and the staff provider are connected. An apportionment is accepted if a worker is only partly engaged in such work.

Indirectly related activities such as training required to directly support an R&D project, maintaining R&D equipment, research to devise new testing or sampling methods, and feasibility studies.

The tax credit

The conditions - Company

  • R&D expenditure may qualify for an enhanced tax deduction against the company income. To qualify, the R&D must be relevant to the trade of the company, or from which it is intended to derive a trade from.
  • Expenditure must not be of a capital nature – capital expenditure is dealt with separately and can qualify for 100% allowances in the year of capitalisation. See Tax facts: Allowances for equipment purchases and research and development.
  • Small medium enterprises (SME’s) may deduct 230% of qualifying expenditure from profits chargeable to corporation tax (225% for profits prior to 1 April 2015).
  • SME’s can claim tax credits in cash from HMRC if a trading loss is created by enhanced R&D expenditure. The payable tax credit can be up to 14.5% of the R&D loss arising. If the cash credit is claimed, the enhanced relief (loss) must be surrendered.
  • SME’s cannot claim for contributions to independent research.
  • A claim can be reduced if the project is subsidised or a grant is received.
  • The maximum tax credit an R&D project can receive is capped at €7.5 million.

Download the PDF version Tax facts – Research & Development: Small and Medium Enterprises

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