R&D Tax Credits are only available to entities within a charge to corporation tax. Therefore, individuals or partnerships made up of individuals are not eligible to claim.
Small & Medium Sized Enterprises (SMEs)
The SME Scheme provides a super-deduction from taxable profits equal to 225% of qualifying R&D expenditure. If the company does not have sufficient profits, the R&D tax relief may be surrendered to H M Revenue and Customs in return for a cash payment equal to 11% of the surrendered amount. This rate has been increased to 14.5% in Budget 2014 and will apply from 1 April 2014.
SMEs that have received grant funding or operate as a subcontractor for another party may still be able to claim R&D tax credits but may be restricted to using the Large Company Schemes.
SME thresholds are applied to the claimant and associated enterprises – together they must have less than 500 employees and have turnover of less than €100m and / or a balance sheet total of under €86m.
Large companies (i.e. entities that are not SMEs) may choose between two schemes. The first operates in a similar fashion to the SME scheme but provides a ‘not-so-super’ deduction equal to 130% of the qualifying expenditure. However, there is no cash payment option.
This scheme is only available up to 31 March 2016 when it will be abolished.
Alternatively, the company may claim the R&D Expenditure Credit which provides a taxable credit at a rate of 10% of qualifying expenditure. Subject to certain conditions, this credit may be payable to a company without sufficient taxable profits.
What is Qualifying R&D?
The definition of R&D for tax purposes differs from the commercial definition. Although the definition broadly follows the accounting standards SSAP 13 and IAS 38, the department of Business, Innovation and Skills also issued guidelines which must be considered.
The BIS guidelines state that:
“R&D takes place when there is a project that seeks to achieve an advance in science or technology.
The activities directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty.”
This definition is not particularly user-friendly, so we have drafted a series of questions to assist with the qualification of R&D projects:
Do the Activities in a Project Qualify?
1. Does the company undertake the development or improvement of products, devices, components, services, materials or processes including projects for internal use, commercial exploitation or unsuccessful projects?
2. Has the company sought to integrate or duplicate existing products, devices, components, materials, services or processes in an improved way?
3. Has the company undertaken research and development on behalf of a customer or client? This will include testing, consultancy or other tasks prepared with respect to a larger overall project.
What is the Advancement in Science or Technology?
4. Have any of the projects mentioned in 1, 2 or 3 above sought an advance in science or technology? Such an advance will improve the knowledge or capability in a field, not just within the company but may include the adaption of knowledge or capability from another field.
The advance may have tangible or intangible benefits but cosmetic or aesthetic improvements do not qualify.
5. Did the company dedicate effort to resolving uncertainty within projects? If the knowledge of whether something is feasible is not readily available or deducible by a competent professional in the field, uncertainty exists. This will include system uncertainty whereby work is undertaken to combine existing technologies in an effective manner.
6. Does the company employ technically experienced or qualified individuals, external parties or subcontractors to work on these projects?
The categories of qualifying expenditure will vary dependent upon which scheme the company is seeking claim under but the main categories include:
- Staffing Costs: Salaries, wages and other cash emoluments. Dividends and benefits in kind do not qualify.
- Consumables: Materials and other items used up in the project including software and utilities.
- Externally Provided Workers: Third party workers employed through a staff provider or agency.
- Subcontractors: Certain payments for subcontracted R&D may qualify.
R&D tax relief is not restricted to companies operating within high-tech industries and indeed, successful claims have been made by companies operating in more traditional manufacturing and engineering industries including the construction and agri-food sectors for example.
The schemes now offer their most generous level of relief since inception of the scheme at the turn of the millennium and as an initial assessment from Capitus is free and without obligation, R&D tax credits should be considered for all relevant projects.