R&D Tax Credits are a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable tax rebate as a proportion of their R&D expenditure.
When defining an R&D project there are specific criteria to meet:
- R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
- Certain qualifying activities related to the project are also R&D, they have to be directly linked to overcoming the scientific or technological uncertainty/technological advance .
- The solution cannot be readily deducible by a competent professional in the field
Related to the trade
There is a requirement that the R&D carried on by the company is either related a trade carried on by the company or from which it is intended that such a trade will be derived. R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade and medical research that has a special relation to the welfare of workers employed in that trade.
There are two schemes for claiming relief, depending of the size of the company:
- The Small or Medium-sized Enterprise (SME) Scheme
- The Large Company Scheme
If the company and the project meet the necessary conditions, then tax relief can be claimed on the following items of revenue expenditure:
- Staff Costs – This means the cost of employing staff directly who are actively engaged in carrying out R&D itself.
- Externally provided workers and sub-contractors – This covers the cost of paying a staff provider for staff provided to the company, or a sub-contractor who are directly and actively engaged in carrying out R&D.
- Consumable Items – These include consumable or transformable materials used directly in carrying out R&D. NOTE: Finance Bill 2015 introduces a new restriction which changes the definition of qualifying expenditure for R&D purposes with effect from 1 April 2015. Where the R&D activity results in goods or services sold in the normal course of a company’s business, the cost of consumable items reflected in those goods or services will not attract tax relief from 1 April 2015. In other words, relief will only be available on the cost of those items fully used up or expended by the R&D activity itself and which do not go on to be sold as part of a commercial product.
- Software – Revenue expenditure incurred on computer software employed directly in R&D.
Research & Development – Capital Expenditure
Enhanced capital allowances are available for capital expenditure on research and development. Allowances are only due if the research and development is related to the trade of the business. The allowance is known as the Research & Development Allowance (RDA) and qualifying expenditure will be eligible for capital allowances of 100%. For further details, see http://www.hmrc.gov.uk/manuals/camanual/CA60000.htm.
Specialist HMRC R&D Units
HMRC have set up specialist R&D units for examining claims to R & D tax relief. These offices deal specifically with R&D claims and will give a ruling on whether certain expenditure qualifies for R&D tax relief.
For a list of these specialist offices, see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD80350.htm