Office for National Statistics: are you making the most of R&D and the tax reliefs
28 February 2020
As a UK-based SME, are you making the most of R&D and the tax reliefs currently available?
Recent data from the Office for National Statistics (ONS) reveals that UK companies’ spend on Research and Development (R&D) totaled £25 billion in 2018.
The UK government actively encourages companies to carry out R&D to help growth and increase profitability by offering a wide range of tax incentives to encourage investment in R&D with different incentives dependant on the size of the company.
These include an increased deduction for R&D spending alongside a payable R&D tax credit for those companies not yet in profit. The government says it is ‘committed to improving access to R&D’ for small and medium-sized enterprises (SMEs).
SMEs are permitted to claim R&D tax relief if they have fewer than 500 members of staff and a turnover of under €100 million, or a balance sheet total of less than €86 million. The relief permits SMEs to deduct an additional 130% of qualifying costs from their yearly profit, in addition to the normal 100% deduction, so giving a total deduction of 230%.
A company may be able to surrender losses for cash repayments where the R&D tax claim creates a tax loss. Currently, this is calculated at 14.5%.
To make the most of R&D tax relief, a company must have incurred expenditure on qualifying R&D projects related to its trade. These must be innovative and should assess and attempt to resolve scientific or technological issues. Qualifying expenditure falls into different categories which include staffing costs, software costs, expenditure on consumables or transformable materials, costs of work done by subcontractors and costs of clinical trial volunteers.
The Research and Development Expenditure Credit (RDEC) is a replacement for the large company scheme, but it can also be used by SMEs which have received a grant, or a subsidy, for their R&D project or are subcontracted to do R&D work by a large company.
The RDEC credit is taxable calculated at 12% of a company’s qualifying R&D expenditure incurred. This credit may be used to discharge corporation tax liability, depending on whether the company makes a profit or a loss, and could also result in a cash payment. Where no corporation tax is due, the amount can be repaid net of tax or used to settle other debts.