Research and development tax relief - SME

Tom Byng,  Tax Partner
Tom Byng, Tax Partner

The Government, with all party support, is committed to encouraging research, development and innovation within the UK economy. To create an attractive regime for companies to develop and exploit intellectual property in the UK - particularly among smaller firms - it is continuing to support the tax credit regime for those that invest in research and development (R&D). R&D has a much wider definition than many people think - remember that the Government wants you to carry out research and development, and it wants you to claim R&D tax relief!

R&D tax relief can improve your company’s cash flow by reducing its tax liability and, in some cases, by obtaining a cash repayment (R&D tax credit).

The relief is only available for companies - and there are two different R&D tax relief schemes depending on the size of your company. The scheme outlined below is available for small and medium-sized companies (SMEs) - those with either annual turnover of less than €100m or a balance sheet figure of less than €86m, and no more than 500 employees. These figures apply to your total worldwide group, plus certain affiliated business.

I do not employ people in white coats, can I claim?

R&D claims are commonly made by businesses in the engineering, pharmaceutical, software development, food and drink and biotechnology fields, but successful claims have also been made by some of our travel agent, manufacturing, design engineers and construction clients too!

What relief is available?

R&D tax credits can be claimed on the cost of employing staff who are directly or actively engaged in carrying out the R&D or in certain supporting activities, the cost of the materials that are used in the R&D and on payments made to subcontractors that are assisting with the R&D.

A business can claim relief in one of two ways. It can set 230% of its qualifying expenditure against taxable profits, that is, it can reduce the amount of the profits on which it has to pay tax by an additional 130% of the qualifying R&D spend. For expenditure before 1 April 2015 this was 225%. Or if a business makes a loss, it can take advantage of the credits by claiming a 33.35p per £1 cash refund on the qualifying R&D expenditure (which equates to a rate of 14.5p per £1 on the enhanced cost). For expenditure prior to 1 April 2015 this was an effective 32.63% on the qualifying spend.

Example

A company spends £20,000 during 2016/17 on qualifying R&D. In addition to the standard tax relief for the expenditure, it can claim relief on an additional £26,000 (£20,000 x 130%). Therefore the total tax relief on the R&D spend is £9,200 (£20,000 + £26,000, at 20%). This means that the net tax cost to the company of incurring the expenditure is £10,800 (£20,000 less £9,200).

If the company were loss making it would instead be able to claim a cash refund of £6,670 (£20,000 x 33.35% or £46,000 x 14.5%).

What are the qualifying criteria?

What actually constitutes R&D is wide ranging, but includes the development or improvement of a product or process - there must be a technological advancement and an attempt to resolve technological uncertainties.

What is a technological advancement?

It is not enough that your new product process or system is commercially innovative; it must be an extension to the existing body of technological achievement or make an appreciable improvement to an existing process, device, product or service. However this can include work on a bespoke product or system.

Note that a project does not have to actually achieve its aims to qualify for R&D tax relief.

What is a technological uncertainty?

It is the practice of taking a potentially feasible idea and determining whether it can be achieved and, if so, how to turn it into a cost effective and reproducible process, device, product or service.

I receive a grant, can I claim?

If the grant is notified state aid then it is not possible to claim SME R&D tax relief on the project, however, the large company R&D scheme (giving an effective 8.8% cash saving or credit) is still available.

If it is not notified state aid then a combination of SME and large company relief will be available.

Have I missed out on previous years?

There is a two year time limit to claim the relief, for example a claim is possible for the year ended 31 December 2015 as long as it is made prior to 31 December 2017.

Can I get help to establish my R&D tax relief claim?

The tax relief available is generous, but claims must be properly made to ensure they meet HMRC requirements. HMRC will review all claims carefully - so it is important to work with experienced tax advisors to ensure any claim meets the necessary criteria.

Any business that wishes to claim R&D tax credits should consult with its accountants or professional advisers.

MHA MacIntyre Hudson has significant experience in preparing and submitting R&D claims in a wide variety of industries and has developed excellent relationships with the relevant inspectors at HMRC to enable claims to be agreed in the most efficient manner.

We have a bespoke process that has been refined over hundreds of claims, which can reduce the time required by your team to a couple of hours, whilst ensuring the benefits are maximised.

For further information, please contact Tom Byng, Head of R&D tax relief team Call +44 (0)20 8446 0922 or email tom.byng@mhllp.co.uk