Research & Development: can you benefit?

The Government is continuing to promote research and development (R&D) with a range of tax incentives. R&D capital expenditure is liable to an automatic 100% deduction under capital allowances so it is worth considering the possible benefits to your business.

There are two schemes, one for large companies and one for ‘small and medium sized enterprise’ (SME) companies. Both schemes provide two main elements of relief:

• an increased deduction for R&D revenue spending, and
• a payable R&D tax credit for companies not in profit.

These schemes focus on qualifying revenue expenditure and are only available to companies. The SME deduction scheme will be the most generally used.

The SME scheme

The R&D relief increases the amount your business can obtain in tax relief from the normal 100% deduction to 225%.

If the impact of this revenue deduction is that the company incurs a loss which it cannot relieve until a future period, then it may be possible to convert to a repayable tax credit. In the 2014 Budget it was announced that the rate of loss conversion into repayable credit is now 14.5% (previously 11%). This applies to qualifying expenditure on or after 1 April 2014.

Key conditions

As an SME you must first be sure that HM Revenue & Customs (HMRC) will accept that the activities undertaken constitute R&D. Your R&D does not have to be undertaken in the UK in order to qualify.

You must also make sure the relevant tax rule conditions are met, such as:

• the expenditure must be from a qualifying revenue category (not be capital expenditure)
• the spending must not be incurred in carrying out activities contracted to the company by another person (however a slightly different form of R&D tax credit may apply)
• the expenditure must not have been met by another person (i.e. if the R&D project is whole or part funded by a grant, or other kind of aid, none of the spending on your project can qualify).

Example

Smith Ltd is an SME and incurs qualifying R&D expenditure during the year to 31 March 2015 of £120,000.

• If Smith Ltd is profitable it will be able to claim a deduction on £270,000, which will reduce its corporation tax liability by £54,000 (assuming a 20% rate), giving the company effective relief on the actual expenditure of 45%.
• If Smith Ltd makes a loss of £270,000 (due to R&D expenditure), which would otherwise be carried forward for relief against future trading profits, then it can be converted into R&D tax credit. The revised rate of conversion of 14.5% means a credit payment of £39,150 (£270,000 x 14.5%) which equates to approximately 33% of the original expenditure.

CONTACT

Claiming R&D relief can be a great benefit for your business but requires expert advice. Contact us for more information.

Phone:  0141 643 9200
Email:   info@adplus.co.uk

NOTES:

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

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