How to take advantage of the Research & Development Tax Credit scheme

Research & Development Tax Credit Scheme History

The Research & Development (R&D) Tax Credit scheme was introduced in 2000. To put this into context this is 7 years before the first iPhone was released. The original scheme was for small companies with the large company scheme following in 2002 and if Apple had been a UK company they could have benefited. In the years since there have been numerous changes but the underlying move has been to a more generous regime.

Small companies originally received 150% of expenditure as a “super deduction” and today this has increased to 230% of eligible costs as a tax deduction. The core principles for eligible R&D are:

  • Seeking to achieve an advance in science or technology
  • Subject to scientific or technological uncertainties
  • Conducted in a systematic and thorough fashion

Eligible costs can include staffing costs, consumable items, software, subcontractors and research contributions. Successful claimants range from software companies to construction, manufacturing, engineering, catering – in fact R&D takes place in every business sector.

The R&D Schemes are constantly evolving and currently you can obtain corporation tax relief via a tax credit of 14.5% of the enhanced expenditure even when no corporation tax has been paid.

By way of an example, a SME Ltd in the year to 31 March 2016 could have had the following results:

Profitable SME

Example: £100,000 of qualifying R&D

x 130% enhancement = £230,000

£230,000 at 20% (CT Rate) gives tax relief of £46,000

£46,000/£100,000 = 46%

Loss-making SME

Example: £100,000 of qualifying R&D

x 130% enhancement = £230,000

£230,000 x 14.5% gives £33,350 (payable R&D Credit)

£33,350/£100,000 = 33.35%

For established companies the corporation tax relief over the normal 20% corporation tax rate is valuable and for the early stage growth companies where no corporation tax has been paid it can provide a useful cash flow supplement.

Advanced Assurance

Since November 2015 companies can apply to HMRC for R&D Advance Assurance. Once this is granted HMRC will allow the claim in the first three accounting periods without further enquiry.  This can be very useful if you are seeking external investors or funding.

Brexit Impact

There has been speculation that Brexit may alter the future of R&D Tax Credits. General opinion is that there will be no immediate effect and with full Brexit being a few years away advantage should be taken of the scheme in the current format. The small companies R&D scheme is seen as generous by the European State Aid rules and as such is classified as Notified State Aid. Under Brexit the UK government should be free to set the rules however this will depend on the UK’s future relationship with Europe.

Condies have considerable experience of assisting companies to maximise their R&D tax credits claims.  For further information on the R&D Tax Credit Scheme, contact James Stewart, Corporate Tax Manager, on 01383 721421 or email james.stewart@condie.co.uk.

Disclaimer - This document is for informational purposes only and does not constitute tax, accounting or legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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