Don’t imagine that Research and Development tax relief is only available for laboratory-type innovations.
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Research & Development Tax Relief
Why aren’t you applying for this under-subscribed and generous tax relief if your business is contributing to the advance of science and technology? Don’t imagine that Research and Development tax relief is only available for laboratory-type innovations.
It can apply to business expenses where new technologies, materials, knowledge, and ideas are being used to surmount old challenges and tackle some new ones.
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:
Designing new products
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.