R&D is broadly defined for tax purposes as activities carried out that “seek an advance in science or technology, through the resolution of scientific or technological uncertainty”. There is a common misconception that R&D tax relief can only be claimed by companies in certain ‘white coat’ industries. However, the relief is available to all companies that perform qualifying activities and BDO has helped with claims across many different industries.
Two R&D tax relief schemes are available, the SME scheme and the R&D Expenditure Credit scheme (RDEC). The scheme under which to make a claim depends on the size of the business.
Companies can claim under the SME scheme if the company or group has fewer than 500 employees and either turnover of less than €100m, or gross assets of less than €86m.
Under the SME scheme, qualifying expenditure gets an enhanced 130% tax relief to reduce taxable profits or increase trading losses. For example, if £100 is spent by a company on R&D expenditure, they will receive an additional £130 reduction in taxable profit (on top of the usual £100 deduction). This is worth an extra £26 in cash. In some circumstances, loss making companies can surrender their additional losses in favour of a repayable credit.
Companies that exceed the SME scheme threshold can claim a payable expenditure credit of 11% of qualifying R&D expenditure which results in a net credit of 8.91% (under the current corporation tax rate of 19%). This is payable whether or not the company is tax paying in the year.
The majority of R&D qualifying expenditure is likely to be costs expensed in a company’s P&L, for example salary costs, consumables, heat light and power. Expenditure relating to R&D which is not capital in nature and is brought into account in determining the value of an intangible asset will also be qualifying expenditure.
If not available in the company, specific R&D records are not needed in order to make a R&D claim, although some type of records should be kept in order to meet the statutory record keeping requirements. Where R&D-specific records are not kept, companies can rely on their best judgement, but should be open about this when making claims, and the basis for any estimates must be reasonable.
Historically, there has been some confusion about whether costs paid by employees and reimbursed by the company qualify for R&D Tax relief. HMRC has now confirmed that these are claimable and there is a facility to amend previous R&D claims: amended claims must be submitted by 31 January 2018. We are currently helping businesses to do this and claim some more cash back.
As the SME Scheme is State Aid, HMRC is now required to publish on the European Commission website details of companies that receive more than €500,000 a year of relief through the SME scheme.
How can BDO assist?
BDO has strong working relationships with HMRC and is a member of the Research and Development Consultative Committee (RDCC). BDO can assist in identifying and maximising R&D tax relief claims and has extensive experience in preparing claims over a range of industries including financial services, food and drink, manufacturing and software.
For help and advice on R&D claims please get in touch with your usual BDO contact or Vincent Walker.
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