Research & Development – Capital Expenditure:
Enhanced capital allowances can be claimed for capital expenditure on research and development. Allowances are only due if the R&D is related to the trade of the business. The allowance is known as the Research & Development Allowance (RDA) and qualifying expenditure attracts capital allowances of 100%.
Stipulations to qualify for R&D Tax Relief
- The business is a small company employing less than 500 people.
- The business is a limited company or plc.
- The R&D by the company must either relate to a trade carried on by the company or be related to something from which trade will derive.
- R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade; and medical research that has a special relation to the welfare of workers employed in that trade.
- The company must not be in receipt of a notified state aid in respect of the project.
- Expenditure must not be subsidized.
- The company must not have been contracted to carry out the R&D.
- The company must be a going concern (that is, must be solvent).
- The R&D project must not receive total aid of more than €7.5 million.
Method of Relief
From 1 April 2015 businesses can claim R&D tax relief of 230% incurred. For expenditure incurred between 1 April 2012 and 31 March 2015, companies could claim 225%. Prior to that, they could claim relief of 200%.
Normally R&D tax relief would be claimed by deducting from taxable profits in the company’s corporation tax accounts, an additional amount equal to 130%, 125%, or 100% of the R&D expenditure, depending on when it was incurred.
A relief at 230% of the expenditure gives businesses liable for the small profits rate of corporation tax at 20% (2016), 19% (2017), a tax saving equal to 46% of the R&D expenditure. That means every £100 you spend of research and development is equal to £33 of tax relief.
Companies that incurred R&D expenses before they started to trade can treat the R&D relief as a trading loss. Again, the rules have changed slightly recently, but here’s another example.
What can R&D include?
R&D according to HMRC is when a project, or a component of a larger project, seeks to achieve an advance in science or technology. This could include:
- Software development
- Designing new products
- Precision engineering
- Products using new materials
- Enhancing existing products or technologies
What part of the process will R&D expenditures cover?
- Staff costs of anyone actively engaged in carrying out R&D itself.
- Externally-provided workers and subcontractors, including the cost of paying a staff provider for provision of staff or subcontractors, so long as they’re directly and actively engaged in carrying out R&D.
- Consumables, including consumable or transformable materials used directly in carrying out R&D. Note that the Finance Bill 2015 introduced a new restriction, which means relief is only available on the cost of items fully used up or expended by the R&D activity itself, it cannot be put against costs intended to be sold as part of a commercial product.
- Revenue expenditure incurred on computer software licenses employed directly in R&D.
- Utility Costs, i.e. water or fuel used directly in carrying out R&D, but not for instance telecommunication costs and data costs.
- External testing.
How it works with Us
- Set up a meeting with us to discuss your idea to determine whether it qualifies.
- We confirm you’re a limited company incorporated in the UK and are undertaking qualifying R&D activities involving innovation.
- We review your accounts to look at your tax position and see what you’ve spent; and we discuss whether or what you intend to spend on qualifying expenditure in the future.
- We confirm areas where you are or have made qualifying expenditure and we pinpoint areas where you may not have realized you were about to make or had made qualifying expenditure.
- We then work with you on the report to send to HMRC which describes your R&D expenditure.
- We amend your corporation tax return (CT600) and incorporate your tax credit calculation.
Email us at firstname.lastname@example.org to find out how we can help you.