R&D Tax Relief
Despite R&D tax relief being introduced in 2000, there still remains a misconception regarding what actually constitutes ‘research and development’ for the purposes of HMRC legislation. R&D tax relief and tax credits are still among the most under-claimed tax incentives currently available.
A series of legislative updates and revisions since the relief was first introduced has transformed this area of taxation from a cumbersome and complicated process into one of the most enabling and generous tax reliefs operating in any OECD country. Yet, despite these changes, R&D tax incentives are still being missed, resulting in thousands of eligible companies losing out on significant tax benefits.
The main reason behind the widespread failure of companies taking advantage of the reliefs is the misconception regarding what actually constitutes ‘research and development’ for the purposes of the HMRC legislation. Most company finance directors mistakenly believe that unless a scientist operating in a secret laboratory and dressed in a white lab coat is employed by the company, then R&D is not taking place. Indeed, a cursory glance at the current R&D legislation would undoubtedly suggest that this is a reasonable assumption to make.
R&D activity does not have to be ‘blue sky’ innovation, nor does it have to consist of creating new technologies. Instead, appreciable improvements to existing technology which would be regarded by those considered experts in the field (company employees for example) to be ‘difficult’ are perfectly acceptable where the R&D legislation is concerned.
So how does the R&D tax relief work?
HMRC will allow an extra 125% (30% for large companies) of identified costs (more of which later) to be written off against taxable profits. Therefore if R&D expenditure of £100,000 is identified, HMRC will allow £225,000 to be included in the tax computation, giving an extra £125,000 of cost to be offset against taxable profits.
The current corporation tax rate is circa 20%, which equates to a £25,000 reduction in a tax liability. Loss making companies are not excluded from the benefits, and tax credits can be claimed on the losses enhanced by the R&D expenditure instead of carrying the losses forward to offset against future profits. Loss making companies are able to surrender the losses attributable to the R&D claim for a 14.5% R&D tax credit.
What expenditure does it relate to?
Identifying the costs associated with the R&D activity is often seen as a laborious and minimally beneficial process when the cost of gathering the information is compared to the tax benefit. In reality, HMRC encourage a pragmatic approach to gathering cost information. The expenditures allowed as part of the claim fall into five key categories: staff costs, consumables, subcontract labour, externally provided workers and heat and power cost.
How far can a company go back?
Retrospective claims can be made for the past two accounting periods which can often result in a significant repayment of corporation tax, or if a company is loss making, a claim for R&D tax credits. It is therefore important to discover if a claim can be made as soon as possible so as not to miss out on any retrospective claims.