Tax relief for innovative corporate businesses

Kirsty Richardson reminds company directors to consider whether they are eligible for the R&D Tax Reliefs.

Research and Development (R&D) tax relief is a company tax relief which applies to all UK companies and can either reduce a company’s tax bill or – for some small or medium-sized companies – provide a cash sum (tax credits).

In both cases, this comes in the form of an enhanced expenditure relief for R&D expenditure that provides genuine incentives for small and medium sized enterprises (SMEs) to conduct R&D. The 2014 Finance Act increased the tax credit arising on R&D relief to 14% of “the surrenderable loss on qualifying expenditure” from 1 April 2014. Depending on the company’s profitability this can be up to 14% of the qualifying expenditure.

So how does R&D tax-enhanced relief work?

The R&D tax relief works by allowing eligible companies to deduct up to 230% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. If losses are made under the SME scheme, the tax relief can be surrendered to claim payable tax credits in cash from HM Revenue & Customs (HMRC) instead of loss relief, subject to certain limits.

What is R&D for tax purposes?

A qualifying R&D project is one that seeks to:

  1. extend overall knowledge or capability in a field of science or technology; or
  2. create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
  3. make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
  4. involve the use of science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way. The project must seek to achieve an advance in overall knowledge or capability in a field of science or technology, not just a company’s own state of knowledge or capability alone. An example would be a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner.

What costs qualify for the R&D Tax Enhancement?

Companies can claim R&D tax expenditure enhancement for their revenue expenditure when:

  • employing staff directly and actively engaged in carrying out R&D;
  • paying a staff provider for the staff provided to the company who are directly and actively engaged in carrying out R&D,
  • consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and
  • power, water, fuel and computer software used directly in carrying out R&D.

If you think your company might have qualifying projects and expenditure, make sure you talk with your accountant to maximise the potential tax advantage to your business.