Research & development (R&D) tax relief
A company incurring qualifying R&D expenditure from 1 April 2015 can claim a deduction equal to 230% of the relevant costs incurred in calculating its taxable total profits. This was increased from 225% between 1 April 2012 and 31 March 2015, and from 200% incurred prior to 1 April 2012.
Where a company also qualifies to claim one of the creative sector reliefs; such as television tax relief or video games relief, you must choose between R&D relief and the creative sector reliefs. You cannot claim both in respect of the same expenditure.
The deduction is given by allowing a further 130% of the qualifying R&D expenditure, in addition to the usual 100% deduction for such qualifying expenditure, in arriving at the adjusted profits for tax purposes.
To qualify as a small or medium sized enterprise (SME) the company must be independent and have:
- No more than 500 employees
- annual turnover of no more than €100m
- an annual balance sheet figure of no more than €86m
These thresholds apply from 1 August 2008 and are twice the thresholds for the EU definition of an SME; this doubled threshold applies only to R&D reliefs, so that a company may be an SME for R&D relief purposes but a large company for all other purposes.
These thresholds must be calculated by taking into account the employees, turnover and balance sheet of all linked and partner enterprises of the SME, not just the SME itself.
The company must also be a going concern; following FA 2012 means not only that the company’s last accounts cannot be qualified on a going concern basis, but also that the company has since not gone into administration or liquidation.
Cap on R&D aid
The amount of R&D tax relief that a company is able to claim through the SME scheme cannot exceed €7.5 million throughout the lifetime of any single project. The SME must check whether it has exceeded the €7.5 million aid cap by carrying out a calculation using the formula set out in CTA 2009, s 1114. That formula compares the SME relief to any ‘notional’ claim which the SME could have made under the large company relief scheme.
If it transpires that the €7.5 million aid cap will be exceeded, the company should consider whether the RDEC can be claimed on the excess. It is also worth exploring whether the project could be split into smaller projects, as each distinct project will have its own aid cap, thereby extending the amount of relief available to the company overall.
It should be noted that the references in the formula to the large company scheme are being updated by FA 2016, s 48. This is because the large company scheme was replaced by the research and development expenditure credit (RDEC) from 1 April 2016. The formula itself is also being amended as it is not necessary to multiply the credit by the main rate of corporation tax, due to the way in which the RDEC operates.
R&D tax credit
A small or medium sized company with a trading loss that has incurred qualifying R&D can surrender all or part of the loss as described below. Firstly the surrenderable amount needs to be calculated. This is the lower of:
- the unrelieved trading loss
- 230% of the qualifying R&D expenditure (from 1 April 2015, lower amounts applied in earlier years – see above)
For these purposes an unrelieved trading loss means the trading loss of the period reduced by any actual and potential claims for relief for that loss in the current period and any other actual loss relief claims made in respect of the loss.
No account is taken of losses brought forward or carried back to this accounting period.
Once this loss has been surrendered the amount of credit given is 14.5% of the surrenderable loss which relates to qualifying expenditure incurred on or after 1 April 2014, and 11% of the surrenderable loss which relates to qualifying expenditure incurred between 1 April 2012 and 31 March 2014. Different rates apply for expenditure incurred before 1 April 2012. CTA 2009, s 1058
For accounting periods ending before 1 April 2012, the amount of the repayable credit was capped at the companies PAYE and NIC bill for the period.
Outcome of 2015 consultation process
The government launched a consultation into ways in which access to R&D tax relief can be improved for small businesses on 16 January 2015. The output from this consultation entitled ‘Making R&D Easier’ was published in October 2015 and aims to improve the way small businesses can access R&D tax relief.
One of the more important outcomes of this consultation process is the introduction of a limited advance assurance process which, broadly speaking, enables small companies to contact HMRC in advance of submitting a claim for R&D for confirmation that the activities they carry out will qualify for R&D tax relief. This process is discussed in more detail below.
Advance assurance for small companies
The main advantage of advance assurance for small companies is that successful applicants’ claims for R&D tax relief will be allowed without further enquiry for the first three accounting periods. Applicants also have the benefit of HMRC specialists being available to assist with queries about the relief, which could be useful if the company has not engaged their own specialist advisers. The scheme is voluntary but companies and their advisers should consider the benefits, as a successful claim gives a greater level of certainty. It could improve the company’s ability to obtain initial funding or secure additional funding, which in turn assists with cash-flow planning.
Advance assurance applications can be submitted before or after the R&D is carried out, and can be submitted at any time prior to the first R&D claim being made. The conditions which must be satisfied by applicant companies are as follows:
- no previous claims for R&D tax relief have been made
- annual turnover is £2m or less
- the company employs less than 50 staff
- the company is not in a group where another company in the group has made a claim for R&D relief
- the company is neither a corporate serious defaulter nor has entered into a Disclosure of Tax Avoidance Scheme (DOTAS). See the Managing serious defaulters and Disclosure of Tax Avoidance Schemes (DOTAS) – Overview guidance notes for additional information.
Where the company has an agent, then the agent can apply on the company’s behalf. Companies without an agent can still apply, as can new companies, although it must have been issued with a tax reference number in order to complete the application. Once the form has been completed, it should be printed and posted to HMRC. Qualifying companies meeting the conditions above need to supply the following information to support their application for advance assurance:
- company accounts
- registration documents from Companies House
- previous company tax returns (unless a new company)
- HMRC correspondence
- contact point such as research manager or director’s name who has direct knowledge of the R&D being carried out and is able to discuss the application with HMRC
In addition, the application will need to include basic information about the company, and unsurprisingly, detailed information about the company’s R&D activities.
Applicant companies are required to fill in form CT R&D (AA). HMRC states in its Research and Development tax relief: Advance Assurance guidance that it will deal with most applications via a short telephone call, although more complicated applications will take longer and may require a visit to the company’s offices.
Successful applicants will receive an ‘agreement letter’ from HMRC, containing details of the company’s responsibilities in respect of the first and subsequent two claims (as applicable).
Although HMRC will not raise any enquiries following the provision of advance assurance, it is likely to contact the applicant company after the first R&D claim has been submitted to check that the activities being carried out have not substantially changed (assuming subsequent claims are expected to be made).