HMRC Publish New Research & Development (R&D) Guide

Research & Development (R&D) remains a highly beneficial area for those companies carrying out qualifying work.  Historically it has been an underused relief with HMRC and Government seeking ways to highlight the availability of the relief.

As part of this on-going initiative, HMRC have published a document on R&D designed to ‘Make R&D easier for small companies’.  It does contain some useful summaries and case studies for those who are unfamiliar with the relief.

As a reminder, R&D tax relief is available to companies that are developing a product through an advance in science or technology by overcoming scientific or technological uncertainty.

For small to medium sized companies (SMEs), the relief takes two forms:

  • Firstly, enhanced R&D tax relief – for every £1 of qualifying costs spent on R&D, the company receives a deduction in calculating their taxable profit for corporation tax purposes of £2.30.
  • Secondly, for loss making companies up to 33% of the qualifying cost can be available as a tax refund.

The Research and Development Expenditure Credit (RDEC) scheme which pays a taxable credit of 11% of qualifying expenditure may also be relevant to SMEs, for example where they are carrying out work for larger companies.

HMRC’s new guide goes through some of the factors to consider in determining whether projects would qualify for R&D relief, but does highlight that the relief is not just for ‘white coat’ scientific research, but also for other “development work in design and engineering that involves overcoming difficult technological problems”.

It also includes case studies on certain areas, such as food, ICT and construction.  The food case study for example notes that, “Creating an innovative chilled food container that provides a substantially longer shelf life than currently available, would […] qualify. The scientific or technological uncertainties to be addressed are in the interactions between the food, gas content and container to keep the food fresh for longer. By contrast, the work in dealing with authorities to comply with extended use-by date regulation would not qualify.”

Eaves and Co has dealt with a number of R&D claims and have a proven track record in completing successful claims and can offer assistance in all aspects of the claim process.  If you would like to discuss how we can help, please get in touch.

Tax Reliefs for Innovative Companies – Patent Box and R&D Tax Relief

The Patent Box

From 1 April 2013 companies that make a profit from the exploitation of patents will Patent Boxbenefit from a reduced rate of Corporation Tax.

The reduced rate of Corporation Tax will eventually be as low as 10% by April 2017, but will be phased in from 1 April 2013. The reduced rate will be achieved by way of an enhanced Corporation Tax deduction.

Definition of Patent for these Purposes

i) Patent granted by the UK Intellectual Property Office or European Patent Office or certain other EEA qualifying patent jurisdictions; or

ii) Rights similar to patents relating to human and veterinary medicines, plant breeding and varieties.

Ownership Conditions

In order to qualify for the reduced rate of Corporation Tax the following conditions must be met:

  • Patents must be owned or licensed-in on exclusive terms
  • The group in which the patent is owned must have played a significant part in the patents’ development or a product which incorporates the patent
  • If the patent has not been self-developed the company holding the patent must actively manage its portfolio of patents

Relevant IP Profit

The profits to which the reduced rate of Corporation Tax is applied are the ‘relevant IP’ profits.

The ‘relevant IP profit’ is broadly speaking the proportion of taxable trade profits (TTP) relating to qualifying patents and Intellectual Property (IP), less a deduction for brand and marketing profits and a 10% deduction to represent routine costs such as premises, employees etc.

Valuation issues may come into play in relation to calculating the deduction for brand/marketing profits.

How Can Eaves & Co Help?

  • Provide advice regarding the conditions and availability of the patent box
  • Provision of computations and accompanying report to be included in the Corporation Tax return
  • Valuation support where the computations include a deduction for notional marketing royalty

Research & Development Expenditure

Qualifying Expenditure

R&D tax relief is available where a company seeks to achieve an advance in overall knowledge or capability in a field of technology or science through the resolution of scientific or technological uncertainty.

R&D expenditure is not limited to laboratories, with innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media qualifying for relief.

For qualifying expenditure the following reliefs are available:

1. Enhanced Corporation Tax Deduction

For SMEs the enhanced deduction is equal to 225% (200% before 1 April 2012) of the qualifying R & D spend, and for large companies the deduction is equal to 130%.

This enhanced deduction is only available on revenue costs directly related to the R&D such as staff costs, materials, utilities and software.

2.Tax Credit

If the company is loss making then it is possible to surrender the loss for a tax credit.

The tax credit is equal to 11% of the lower of (i) 225% of Qualifying R & D expenditure, and (ii) the unrelieved trading loss in that period.

Example

If an SME spends £100,000 on qualifying R&D then it will be entitled to a deduction from taxable profits of £225,000.

If the above the company makes a loss of £300,000 the company can surrender the loss for a tax credit.

The tax credit is equal to £225,000 x 11% (lower of £225,000 & £300,000) which is £24,750.

The loss carried forward will be restricted by the loss surrendered, in this case to £75,000 (£300,000 – £225,00).

Over 88% of Eligible Companies Not Making Full Use of the Research & Development (R&D) Tax Relief

According to a recent study by Chantrey Vellacott DFK  Accountants, only 17,000 out of 150,000 potentially qualifying companies that undertake research and development activities are making claims for R&D tax relief.

It is suggested that the low take up of R&D tax relief may be as a result of a misconception that R&D only takes place in laboratories, which means innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media, can be easily missed.

Companies that undertake qualifying R&D expenditure are eligible for an enhanced Corporation deduction equal to 225% of the R&D expenditure for SMEs and 130% for large companies.

If an SME makes a loss and incurs R&D expenditure in the year, it is possible to surrender some of the loss for tax credit payment equal to 11% of the lower of 225% of R & D expenditure and the loss.

Therefore these reliefs are extremely beneficial for the companies involved.

If you would like more information on R&D tax reliefs including details of what qualifies as R&D please contact a member of the Eaves & Co team.

Top Tax Tips for Owner Managed Businesses – Tip 3 – R&D Tax Relief

Top Tax Tips for Owner Managed Businesses

3. R&D tax relief

For small and medium size companies, relief is available for qualifying costs incurred on Research and Development (R&D) at 200%, (increasing to 225% from 1 April 2012).

This means that for every £100 spent on qualifying expenditure the company should receive a deduction for corporation tax purposes of £200.

For loss making companies a tax credit/refund is available to give a cash flow advantage.

When making a claim for R&D tax relief, it is important to ensure that the activities qualify as Research and Development.

This is the subjective area of making an R&D credit claim and our policy is to draft a document as part of our claim which supports the activity as R&D.  It may be possible for us to prepare a claim with a contingent element for fees.

Research and Development and Patent Box

The Budget announced some significant and beneficial changes to R&D Tax Credits:-

– The rate of credit available has been significantly increased

-More companies will be able to access credits as the lower spending threshold is removed

However, what is also important for innovative companies is the new “Patent Box”

This is a 10% rate of tax for companies after April 2013 on patents that are brought into use now

For more information call Eaves & Co Leeds, on 0113 2443502