Research and Development (R&D) tax credit can apply to any size of company and is a tax relief that can either reduce your company’s tax bill or, for some small or medium sized (SME) companies, can provide a cash sum.
The recent government announcement of planned advance assurance for SMEs is welcome news, as it will allow an existing or a start up company to ‘test the water’ before committing any of their valuable funds to the R&D element of their business plan.
There are three key indicators as to whether your business will qualify:
First and foremost, to be eligible for tax relief on any qualifying R&D spend, the company must be carrying on a project that seeks an advance in science or technology environment.
It is not sufficient to simply state a project, the company must be able to clearly demonstrate what scientific or technological is being sought.
This advance can include new or improved products, services or processes and must be related to your company’s trade, either an existing one, or one that you intend to start up based on the results of the R&D. For tax purposes science does not include work in the arts, humanities and social sciences (including economics).
Secondly, you should be aware that the R&D tax credit can only be claimed if the company is liable for Corporation Tax.
And finally, the company must be a going concern and the latest accounts must have been prepared under that basis. The accounts must not indicate anything that could call into question its ability to continue in business.
If you meet the above criteria note that a claim may only be made in respect of revenue expenditure, such as for premises costs, utilities and wages.
Any capital expenditure may not be included, though there is a separate capital allowance for R&D.
So, your business meets these three basic requirements, then read on to see which scheme is best for your business.
There are currently three schemes for claiming relief, dependent on the size of the company;
- the Small or Medium-sized Enterprise (SME) Scheme;
- the Large Company Scheme, and
- Research & Development Expenditure Credit (RDEC).
From 1 April 2015 relief is given at 11% of qualifying R&D expenditure. This rate applies to all three schemes.
For details of the tax relief available for each of these schemes please refer to our free eBook.
The rules for qualifying expenditure.
The rules for identifying qualifying R&D activity and calculating R&D expenditure remain unchanged and can be found on the HMRC website.
To assess whether your business qualifies is a difficult process as the rules are governed by legislation, General Accepted Accounting Practice, and Department of Trade and Industry rules, and each business needs to be separately assessed.
The advance assurance for SMEs will aid the uncertainty in this area and will certainly encourage innovation and growth in the science and technology sector.