A practical guide to claiming R&D tax relief

How the relief works R&D tax credits – company tax relief which gives an increased deduction for certain qualifying expenditure. The increased deduction reduces the taxable profits and hence the amount of corporation tax payable Loss making small or medium companies can in certain circumstances surrender the losses arising as a result of the increased deduction in return for a payable credit.

What is R&D for tax purposes The DTI guidelines explain what is meant by R&D for a variety of tax purposes. R&D takes place when a project seeks to achieve an advance in science or technology. Activities which directly contribute to achieving the advance through the resolution of scientific or technological uncertainty are R&D.

A scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. Uncertainties that can be readily resolved by a competent professional working in the field are not scientific or technological uncertainties.

Qualifying R&D expenditure Must not be capital expenditure It must be expenditure attributable to relevant R&D directly undertaken by the company or on its behalf It is expenditure on: –Staffing costs –Software or consumable items –Externally provided workers –Subcontracted R&D

The amount of payable credit claimable is limited to the amount of the total PAYE and NIC liabilities. The claim for the payable credit must be made in the company tax return or amended return. Minimum spend = £10,000 The R&D expenditure must not be subsidised Record keeping. Some other conditions

Making a claim Identify the R&D project and the activities included within it. Identify the expenditure incurred directly in carrying out those activities. Check whether the company is small/medium Calculate the relief due Enter R&D amount on CTSA Return (long version – CT600 version 2)

Help in making a claim Help in putting a claim together can be found on the HMRC website at Your R&D unit will also be able to provide advice on what can be included in a claim

A quick R&D example

R&D Example – Ecowash Ltd Ecowash Ltd is a small company and after reviewing the published guidance, it has come to the conclusion that it’s activities leading to the development of a new biodegradable cleaning product are R&D in line with the DTI guidelines. The expenditure relating to those activities was revenue expenditure and has been deducted in the accounts to arrive at an accounting profit of £80,000. After various tax adjustments its profit for tax purposes is £85,000. The company has identified its R&D expenditure as follows;

A). Staff costs - £300,000 An analysis has been provided and these include: £180,000 on technical staff (who worked directly on solving the scientific and technological uncertainties posed by the project) £30,000 on sales staff (who canvassed customers as to the fragrance and packaging of the new product) £50,000 on office and support staff £40,000 on scientific staff employed via a staff agency

Staff costs Allowable Only the costs of those staff directly and actively engaged in the R&D are qualifying expenditure and so the costs relating to the sales and support staff will not qualify for relief. The qualifying staff costs are therefore £220,000 Comprising Technical Staff £180,000 Scientific Staff £40,000

Software & Consumables B). Software and Consumable items - £78,000 Including fuel and energy costs directly incurred in the R&D and the cost of chemicals, ingredients, and lab equipment. Software and Consumable items Allowable As these directly related to the R&D activity they are all eligible for relief The qualifying software and consumable items costs are therefore £78,000

C). Subcontracted R&D costs - £175,000 The analysis provided shows that the company subcontracted specialist development activities to another unconnected company at a cost of £175,000. Subcontracted costs Allowable Ecowash Ltd can claim 65% of the costs relating to the R&D work it subcontracted to another unconnected company. The qualifying subcontracted costs are therefore £175,000 x 65% = £113,750.

Enhancement The enhancement due is therefore (£) A). Staff costs220,000 B). Software & Consumables 78,000 C). Subcontracted costs113,750 – 411,750 £411,750 x 50% = £205,875

Adjustment for Corporation Tax Adjusted Profits£ 85,000 Less R&D enhancement£205,875 Losses arising£120,875 The company decides to surrender the losses arising in return for a payable credit. The payable credit is at a rate of 16% of the surrenderable losses. The loss arising is £120,875 x 16% = a payable credit of £19,340 There is no loss remaining to carry forward.