The Treasury has begun a wide-ranging review into the current Research and Development (R&D) tax credits scheme to ensure it continues “to be fit for purpose”.
A consultation exercise is now underway that will look at all elements of the scheme, which either reduces corporation tax liabilities or generates a cash credit.
It was first introduced by the government in 2000 and is now used by 60,000 companies a year.
The government’s net expenditure on research and development (R&D) reached a new high of £13.1bn in 2019.
It has target to raise investment on R&D to 2.4 per cent of gross domestic product (GDP) by 2027.
Chancellor Rishi Sunak announced the extensive review of the R&D tax relief system in his spring Budget.
He said the objective was to ensure “the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted”.
There is a perception that the credits are just for young companies at the start of their development. That is certainly NOT the case.
The SME R&D relief currently available provides an enhanced deduction for tax purposes of an additional 130 per cent of qualifying revenue expenditure on qualifying R&D, in addition to the 100 per cent deduction already available for revenue expenditure under the normal tax rules.
Where the SME is loss making, alternatively, the SME may claim a tax credit up to 14.5 per cent of the surrenderable loss.
So, who is eligible for R&D tax relief under the present system? HMRC has set out some clear rules and guidelines.
It says your company can only claim for R&D tax relief if a “project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty” – and not simply an “advance in its own state of knowledge or capability”.
The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.
If your company or organisation is claiming tax relief under the SME scheme it must own any intellectual property that might arise from the project.
It is not enough to say that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services if they don’t incorporate any advance in science or technology.
You can’t claim R&D tax relief under the SME Scheme if you’ve been subcontracted to do the work on behalf of somebody else.
It’s also worth pointing out that your project doesn’t have to be a success to qualify for the relief. The fact that it failed can be used to show that its work was genuinely pioneering.
However, if your company receives a subsidy or grant for an R&D project, it may affect how much tax relief you can claim.
Gaining this support can be an important part of a business’ decision whether to make an investment that can see very real benefits for its future.
The requirements of the scheme are broad. It can include creating new products, processes or services or changing or modifying existing ones.
• To discuss if your business may be eligible R&D tax relief please contact me on 01772 430 000