United Kingdom: R&D Tax Credits - Opportunities for Large Companies
28 August 2014
Posted by: Author: Smith & Williamson
Author: Smith & Williamson
Large companies undertaking R&D may be eligible to claim significant additional tax relief. From 1 April 2013, this can result in a cash receipt from HMRC even when no corporation tax has been paid.
Research & development (R&D) tax relief is the main UK tax incentive for promoting innovation and investing in R&D. Despite being on the statute books for over a decade, there are still companies not claiming this hugely valuable tax relief, or not taking its full benefit. For large companies there are now two alternative R&D tax relief regimes running in parallel, providing significant opportunity and flexibility.
R&D covers companies in virtually every industry which are undertaking some form of innovation; this will include innovation in products and services, as well as in their support functions.
Industries for which we have successfully made claims include construction, advertising, telecoms, financial services, and gambling, as well as the more obvious manufacturing, energy, defence and life sciences. The software, internet and communications spheres are good examples where R&D takes place in supporting functions as well as being industries in their own right.
What we offer
At Smith & Williamson, we have a team of corporate tax advisers dedicated to working with companies involved in R&D. With specialist knowledge in this area, we can help you maximise your R&D claims and ensure that they are robust.
Working with your company
- assess the viability of an R&D claim in relation to your activities, and advise on areas of uncertainty
- review your costs to determine which qualify for R&D relief
- advise on how to structure companies and contracts to benefit from relief
- advise on accounting and record-keeping to support claims
- prepare and submit sound claims and reports to HMRC to utilise all available relief while minimising exposure to penalties
- help to ensure cash is received promptly from HMRC
- deal with any HMRC correspondence and enquiries.
What is R&D?
In the first instance, R&D is defined by reference to projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones.
Only publicly available knowledge is assumed, so that R&D may be undertaken even when similar development has been made by a competitor, for example, but retained as a trade secret.
There is inevitably considerable ambiguity in many cases, so each case must be looked at on its own merits.
Which scheme to choose
Under the rules that have applied since 2002, large companies can now claim an extra 30% tax reduction for qualifying R&D expenditure giving an effective tax saving of 6.3% of the relevant expenditure (at a 21% rate of corporation tax).
For expenditure from 1 April 2013, an R&D expenditure credit (RDEC) is available as an alternative (by irrevocable election) to the 30% deduction, and which it entirely replaces from 1 April 2016.
The RDEC provides a 10% credit on R&D expenditure (49% for trades within the oil and gas ringfence). As it is itself taxable, it can create an effective tax saving of up to 7.9% of the relevant expenditure.
A key appeal of the RDEC is that it can generate a cash payment to the claiming company, which is not available under the enhanced deduction regime. There are detailed offset provisions against corporation and other taxes, and a limit to the PAYE/NIC of the R&D workers, before the credit can be converted to a cash payment.
Originally, the RDEC was designed to be accounted for 'above the line' in the company's profit before tax but specific accounting treatment is not required under legislation nor guidance issued by HMRC. Accounts treatment may however impact cost-based contracts, staff bonuses, the reported tax rate and other financial ratios. The impact of accounting for the RDEC should be explored before a claim is made.
These R&D reliefs are available to companies treated as 'large' for R&D purposes. In this respect, a company is large if it, together with appropriate proportions of any 'linked' or 'partner' enterprises has:
- 500 or more employees, or
- turnover exceeding €100m and balance sheet total exceeding €86m.
Some further detail of the complex definitions and further rules is given in our summary R&D brief at https://www.smith.williamson.co.uk/uploads/publications/rd-tax-credits.pdf
Small or medium-sized enterprises (SMEs) should consider the R&D tax relief opportunities available to them – see our summary at https://www.smith.williamson.co.uk/uploads/publications/rd-tax-credits.pdf. They may also claim under the large company schemes for subcontracted, grant funded, subsidised or project-capped R&D.
Qualifying R&D expenditure must be revenue expenditure on:
- employee and agency costs
- software and consumables
- certain indirect expenditure.
In the case of agency costs, only 65% of the cost qualifies for relief.
In contrast to the SME scheme, subcontracted out costs do not generally qualify, but those subcontracted to invdividuals, partnerships or designated bodies may do so (also only 65% of costs qualifying). Funded projects or those subcontracted in do qualify (and can be claimed under the large companies schemes by SMEs).
Capital expenditure is excluded, although the accounting treatment is not necessarily followed, and even then R&D capital allowances may be available. Advice should be sought in these areas.
Claims under both schemes must be made within two years of the end of the accounting period in which expenditure is incurred. HMRC has special R&D units that consider claims carefully, so it pays to prepare and present them carefully.
For periods covering between April 2013 and March 2016, it will be necessary to consider whether it is more appropriate to claim under the enhanced deduction rules or under the new RDEC provisions.
How we can help
Many companies miss out on claiming R&D relief because they do not fully identify those activities or costs which qualify for the relief in time. If you would like to find out whether and to what extent your company and activities are eligible, or you want to reassess your current claims process, get in touch with a member of our team.
This article first appeared on mondaq.com.