A guide to Research and Development (R & D)
R & D is a Corporation Tax (CT) tax relief that may reduce your company’s tax bill, or, in some circumstances, you may receive a payable tax credit.
It applies to small and medium-sized companies (SME). To qualify as an SME the following conditions must apply:
- Less than 500 employees
- Turnover of less than €100million
- Balance sheet total of less than €86million
What is R & D Relief:
For tax purposes, R & D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology.
There are two schemes available:
- The SME scheme
- A company can get 230% tax relief on their qualifying R & D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit
- Research and Development Expenditure Credit (RDEC) scheme
- A taxable credit is available at 11% of qualifying R & D expenditure. For loss-making companies, the tax credit is fully repayable.
- Companies with no CT liability will benefit from RDEC either through a cash payment or a reduction of tax or other duties due. The payable credit is limited to the Company’s PAYE/NIC liabilities of the staff engaged in qualifying activities.
What qualifies as R & D
Work that advances overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties, may qualify for R &D relief.
This can include creating new processes, products or services, making appreciable improvements to existing ones, and even using science and technology to duplicate existing processes, products and services in a new way. But pure product development in itself does not qualify.
Examples include software development, engineering design, new construction techniques, bio-energy, cleantech, agri-food and life and health sciences.
What costs qualify
- Direct R &D staff costs – salaries, wages, class 1 NIC and pension contributions for staff directly and actively engaged in the R & D project.
- Externally provided R & D staff – These are the staff costs paid to an external agency for staff who are directly and actively engaged in the R & D project (not employees or subcontractors). Relief is usually given on 65% of the payments made to the staff provider.
- Subcontracted R & D
- SME scheme – 65% of payments made to unconnected parties can generally be claimed.
- RDEC scheme – not generally allowable unless it is directly undertaken by a charity, higher education institute, scientific research organisation or health service body – or by an individual or a partnership of individuals.
- Consumable items – Cost of items that are directly employed and consumed in qualifying R & D projects
- Software – Cost of software that is directly employed in the R & D activity.
- Prototypes – Where a prototype is created to test the R & D being undertaken, the design, construction and testing costs will normally be qualifying expenses, unless the prototype is built with a view to selling it.
What costs do not qualify
- Production and distribution of goods and services
- Capital expenditure
- Cost of Land
- Payments for the use and creation of patents and trademarks.
How to claim R & D tax relief
R & D relief is claimed via the Company Tax Return Form, CT600.
More detailed guidance can be found on the HMRC website here:
If you need any advice or you feel that you may be eligible for R & D relief then please get in touch and we can help you with your claim.