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:

http://www.hmrc.gov.uk/gds/cird/attachments/rdsimpleguide.pdf

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.