Research and Development (R&D) Tax relief and Tax Credits can help limited companies reduce their Corporation Tax liabilities.
In order to qualify for R&D relief, you need to be trying to innovate how you conduct your business.
There are a few ways you could do this, for example:
- Create a new product or improve an existing product
- Develop a new service or improve an existing service
- Design a new business process which aims to improve organisational efficiency
You dont have to own the intellectual property of these developments, but claims must be made within two years of the end of the financial year in which the expenditure was incurred.
The main qualifying costs are internal labour costs, a proportion of subcontracted R&D work and the cost of qualifying direct consumables. If you seek advice or help from a specialist, youre likely to increase the value of your claim.
What qualifies as an R&D expenditure?
- Staffing costs (such as wages, pension contributions, and any other direct staffing costs), but not benefits in kind.
- Software and consumable items relating to development work.
- Prototypes and costs relating to manufacturing trials of R&D projects.
- Subcontracted R&D work (qualifying at 65% of cost only).
- Utilities (water, fuel and power) relating to development work.
- Externally provided workers doing R&D work (qualifying at 65% of cost only)
- Clinical trial volunteers on R&D projects.
How is R&D relief calculated?
Relief is achieved by enhancing or uplifting the amount of R&D spend that can be deductible against profits. The uplifts are:
- Up to 31st March 2015, R&D spend is uplifted by an additional 125%
- From 1st April 2015, R&D spend is uplifted by an additional 130%
Where an accounting period covers two different financial years (for example, the year ending 31st December 2015 will have some R&D spend uplifted at 125% and some at 130%) then the costs can be split on a time basis and uplifts applied to the relevant portions.
By enhancing the R&D spend you may create a taxable loss and this could be surrendered for a cash refund, albeit subject to a discount, but this can be an extremely useful source of additional capital for new companies.
How to estimate the value of your claim
Multiply the value of qualifying R&D spend by the appropriate years uplift.
Deduct this result from the companys otherwise taxable profit, and if the result is positive, multiply the result by the appropriate Corporation Tax rate. The result is the value of the claim.
If the result is negative, the Company may elect to take a Tax Credit as a cash refund. To calculate the available credit, multiply the loss (up to a maximum of the sum of the R&D spend plus the uplifted amount) by the appropriate tax credit rate (11% from 1st April 2012 to 31st March 2014 and 14.5% from 1st April 2014 onwards) and the result is the value of the repayable tax credit. If you have already paid corporation tax for the year and the R&D claim is being made following amendment then this tax may also be refunded.