Relief for research and development expenditure - introduction
Research and development (R&D) tax relief is an extremely generous relief which no company involved in qualifying R&D work can afford to miss out on. Claiming R&D relief can be particularly valuable for a new business, which may be able to reduce its tax bill or claim a payable tax credit to help with cashflow. A claim for a payable tax credit may even be possible in respect of pre-trading expenditure.
Only companies can claim R&D tax relief (or credit).
To be able to claim the relief the company must incur revenue expenditure on R&D which:
- falls to be accounted for as R&D under generally accepted accounting practice (GAAP);
- comes within the definition of R&D provided by the Department for Business, Innovation and Skills (BIS) guidelines; and
- meets the conditions in CTA 2009 for R&D tax relief.
To qualify for relief:
- the expenditure must be incurred on activities which contribute directly to, or are qualifying indirect activities of, an R&D project;
- the aim of the project must be to seek an advance in science or technology by resolving scientific or technological uncertainties; and
- the expenditure must fall within a category of qualifying expenditure.
For these purposes:
- undertaking a project is not the same as making an accidental discovery;
- science or technology excludes the arts, humanities, social science and economics; and
- the advance must be an advance in the overall knowledge or capability, not just the company's.
There are two schemes, the small and medium sized enterprise (SME) scheme and the large company scheme. In some circumstances an SME can claim relief under the large company scheme when it cannot make a claim under the SME scheme.
Relief under the SME scheme relief allows the company to claim an enhanced deduction for the R&D expenditure. The SME can claim 230% of the qualifying expenditure.
A loss making SME can surrender the enhanced expenditure and claim a payable tax credit of £32.63 for every £100 of qualifying expenditure from 1 April 2014 (previously £24.75 for expenditure after 1 April 2012).
For R&D expenditure made on or after April 2016 large company relief is given by way of a claim for an 'above the line' (ATL) credit. The ATL expenditure credit is at the rate of 13%. The credit is fully payable to companies with no corporation tax liability.
From April 2021 proposed legislation to be included in FA 2021 will restrict the amount of payable R&D tax credit which a SME can claim. Under the proposed legislation the maximum amount that can be claimed by an SME will be restricted to £20,000 plus 300% of its own total PAYE and NICs liability for the period and, potentially, 300% of some PAYE and NICs of connected companies. The total of the PAYE and NICs liability to which the multiplier is applied is the company’s relevant expenditure on workers for payment periods ending in the accounting period.
A company will be exempt from the cap if:
- its employees are creating, preparing to create or managing Intellectual Property and
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons
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