The R&D tax relief schemes are an HM Revenue & Customs (HMRC) incentive designed to encourage innovation by companies operating in the UK.
The Government has expressed its desire to make the UK the most attractive place to start and invest in innovative companies and, as a result, the incentives for companies to develop new and existing products, processes and services have continued to improve. The Government’s objective for the scheme is to encourage increased R&D spending, to attract further investment in innovation.
The reliefs available may reduce the corporation tax bill for the claimant company and in the case of small and medium companies (SME’s) they may be able to choose to receive a tax credit instead, by way of a cash sum paid by HMRC. This can be an important source of funding for some companies.
R&D tax reliefs have been around since 2000 but in recent years the rates have increased significantly to further incentivise companies to claim. Initially reliefs were only available for SME’s however a separate regime followed for Large Companies in 2002 and the Research and Development Expenditure Credit (RDEC) scheme for Large Companies was introduced from 1 April 2013.
A company can only claim for R&D tax relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of a scientific or technological uncertainty.
The two key criteria in determining whether a project is eligible are ‘innovation’ and ‘uncertainty’.
We have the experience to be able to understand the clients business and make an assessment as to whether the project will qualify.
If the company and the project both meet the necessary criteria, then it is possible to claim relief on revenue expenditure, and in some cases also capitalised revenue expenditure, across three main areas:
Although R&D relief is only available for ‘revenue expenditure’ (generally, day-to-day running costs, as opposed to capital expenditure), if the company is involved in R&D and they spend money on capital assets, they may be able to claim R&D capital allowances.
Under the SME scheme a qualifying project would generate a deduction of 225% (increased to 230% from April 2015) of the qualifying expenditure. This could generate tax savings equivalent to 45% (increasing to 46%) of the qualifying spend. If the claimant qualifies for repayable credits this could generate a cash refund to the claimant of up to 32.62% (increasing to 33.35%) of the qualifying spend.
The large company scheme is available to any company that does not qualify for the SME scheme. The scheme is similar to the SME scheme except the deduction is 130% of qualifying expenditure which would generate a tax saving equivalent to 26% of the qualifying spend.
Under the RDEC scheme, which replaces the large company scheme from April 2016, the claimant could claim a credit of 10% after allowing for sets offs against any corporation tax liability. This can be set against future tax liabilities or surrendered for a cash refund.
If the company or organisation has received a subsidy or grant for an R&D project, this may affect how much tax relief they can claim. If the subsidy or grant is a ‘State aid’ recognised by the European Commission, then they can’t claim anything under the Small or Medium-sized Enterprise (SME) Scheme. For any other type of subsidy or grant, the Research & Development expenditure they can claim for is reduced by the amount of subsidy or grant received.
However they may be able to claim under the Large Company Scheme instead.
Just because the company or organisation has never made a claim for R&D tax relief does not mean that it’s too late to do so now. Whilst strict time limits apply it is possible to make retrospective claims for earlier years.
We would carry out an initial consultation with the client to ascertain whether there is a basis for a claim. If in our opinion we believed that the client had a basis for making a claim we would have a more detailed meeting with the client from which we would then prepare a report in support of the claim.
Once the report and claim have been agreed with the client we would submit the claim to HMRC. Any points raised by HMRC would be discussed with the client and advisor as required.
We would remain responsible for dealing with any HMRC enquiry into any aspect of the claim.
We operate on a no win no fee basis. Where we are successful our fees would be based on a % of the overall tax savings generated for the company.
Importantly you get to provide your clients with a vital service. Should you fail to recognise a potential claim then it could undermine your relationship with the client particularly where a competitor firm approaches your client offering the service.
Where an advisor refers us in to one of their clients we would agree an appropriate fee sharing arrangement with the advisor.