How can Research and Development provide a tax benefit?
By David Pritchard, Mander Duffill
This article focuses on the tax benefits of Research and Development (R&D) and making a claim through the small and medium-sized enterprises (SME) scheme. There is also a large company R&D scheme; however, it was felt that the SME scheme is likely to be of more relevance to GGI members.
To qualify for this claim as a SME, the company must have less than 500 staff, turnover of less than EUR 100 million and a balance sheet total of less than EUR 86 million.
The UK tax authority, HM Revenue & Customs, has been providing incentives to companies to complete R&D for several years. There are still companies that either believe the work they are completing does not qualify or they are simply unaware of the scheme.
The most significant of these issues is the focus on that which actually qualifies as R&D. An internet search for “What is R&D?” produces a wide variety of results. However, the most important in this context is that outlined by HM Revenue & Customs. Their definition is based on answering the following four questions:
- How has the project looked for advancement in science and technology?
- How has the project overcome uncertainty in reaching its goal?
- How has the project tried to overcome this uncertainty?
- Would the project have been easily worked out by a professional in the field?
Any client looking to claim that a project qualifies as R&D should give the employees who are directly involved in the detail of the project these questions to answer. The more technical the responses to these questions, the more merit the claim for R&D would have with HM Revenue & Customs.
Once a conclusion has been drawn about whether the project qualifies for R&D, the focus then moves on to what costs can be claimed as R&D expenditure. Again, HM Revenue & Customs provides clear guidelines as to what qualifies, and these can be found on their website, www.gov.uk/guidance/corporation-tax-research-and-development-tax-relief-for-small-and-medium-sized-enterprises.
After determining the costs that qualify, the next stage is understanding the impact in terms of tax.
Any costs that qualify for R&D will attract an enhancement of 130% in the corporation tax computation. For example, if GBP 100 of costs were incurred relating to R&D, a further GBP 130 can be deducted in the corporation tax computation. This provides a clear insight as to the benefit of an R&D claim; without incurring any additional expense, the company receives an extra 130% against its corporation tax liability.
There are two possible outcomes from this point, determined by the individual client’s position:
- Loss-making companies can receive a tax credit from HM Revenue & Customs. This option is only available to loss-making companies.
- Receiving the enhanced expenditure as a further deduction against corporation tax.
In most cases, companies that are focused solely on the development of technology and software would opt for the tax credit as they are likely to be in the development stage with limited sales and therefore loss making. The opportunity to receive money could be vital. The tax credit is calculated by comparing the trading loss against the total R&D expenditure, which includes the enhancement. The company would receive a tax credit of 14.5% of the lower of these two numbers.
One point that is sometimes overlooked when opting for the tax credit is that the client must be a going concern at the date of the R&D tax credit claim. The client cannot rely on the tax credit to remain a going concern.
Conversely, companies which carry out R&D alongside profitable trade and do not have these cashflow issues would benefit from the enhanced expenditure. This would result in a tax saving at the current rate of UK corporation tax of 19%.
The major point to take from this article is the fact that clients need to be made aware of the tax benefits of R&D and the fact that they do not need to meet demanding definitions of R&D. The most important definition is outlined by HM Revenue & Customs’ four questions. If these can be answered with sufficient detail, companies need support in allowing the appropriate costs to be included and need to receive the correct advice in terms of receiving a tax credit or benefiting from the enhanced expenditure.
David PritchardMander Duffill, Chippenham, UK
T: +44 1249 650441
Mander Duffill is a firm of chartered accountants, and tax and financial advisers, with offices in Chippenham, Devizes and London. Their aim is to provide the best possible service to their clients. They are proud of their history, supporting individuals and businesses for over 70 years.
David Pritchard specialises in research and development claims and providing tax advice on an array of issues. David aims to provide great service to clients and is focused on building strong working relationships to ensure all possible tax efficient opportunities are explored.
Published: August 2019 l Photo: Gorodenkoff - stock.adobe.com