Introduction »

Are you getting credit?

Research and development (R&D) by UK companies is being actively encouraged by Government through a range of current tax incentives.

The incentives are only available to companies and include:

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

The R&D revenue relief increases the amount a company can obtain tax relief on to more than the normal 100% revenue deduction. This relief is 225% for expenditure incurred by a small or medium-sized enterprise (SME) on or after 1 April 2012. Large companies are subject to a different regime not considered here.

The first essential matter to determine is whether HMRC would accept that the particular activities constitute R&D. The second is making sure the relevant tax rule conditions are met, the most important being:

• the expenditure must be from a qualifying revenue category and not be capital expenditure
• the R&D does not have to be undertaken in the UK
• 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 (if the R&D project is funded in whole or part by 'State aid' such as a government grant, none of the spending on that project can qualify for R&D tax credits).

The relief in operation

Neuf Ltd is an SME and incurs qualifying R&D expenditure during the year to 31 March 2013 of £100,000.

Assuming Neuf Ltd is profitable it will be able to claim a deduction in respect of its R&D expenditure of £225,000. This will reduce its corporation tax liability by £45,000 (assuming a 20% rate), giving the company effective relief on the actual expenditure of 45%.

If, on the other hand, Neuf Ltd is making losses, the £225,000 attributable to the R&D expenditure can either be carried forward for relief against future trading profits or converted into a payable R&D tax credit. The rate of conversion is currently set at 11% so this would generate a payment to the company of £24,750 (£225,000 x 11%) which equates to 24.75% of the original expenditure.

If this is something that you would like to discuss in more detail, please do get in touch.

Introduction »