Research and development (R&D) tax relief is a corporation tax relief that is available to companies who undertake research and development work on projects seeking to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.
The level of relief and type of claim possible depend upon whether the claimant company is small or medium (SME) or a large company.
Firstly in order to be considered as a qualifying R&D project any activity must meet the definitions set out by the Department for Business, Innovation and Skills. If the necessary criteria are met enhanced R&D tax relief can be claimed on revenue expenditure such as staff costs, subcontractor costs and consumable. If only part of these relate to qualifying R&D activities then tax relief can only be claimed for an appropriate proportion of the relevant cost.
SME relief (accounting periods ending before 1st April 2024)
If a company is an SME then the tax relief on allowable R&D costs is currently 186 percent which means that for every £100 of qualifying costs, the company can claim an additional expense of £86 on top of the £100 spent. For companies with sufficient profits, this will simply be deducted against the taxable profits.
Alternatively, if the company makes a loss it can choose to make the deduction above and carry forward the resulting loss or it can instead elect to receive R&D tax credits. This will give rise to an actual tax repayment although the relief will be given at a rate of 10 percent of the R&D costs and uplift rather than at the full rate of corporation tax that would otherwise be available in the future if the company becomes profitable.
Large company relief (accounting periods ending before 1st April 2024)
For large companies, the Research and Development Expenditure Credit Scheme (RDEC) can provide tax relief between 14.7 percent and 16.2 percent of the amount of qualifying R&D expenditure depending upon the company’s applicable rate of corporation tax.
Merged relief (accounting periods commencing on or after 1st April 2024)
This relief is introduced for accounting periods commencing on or after 1st April 2024 is based largely on the above RDEC rules but includes a number of beneficial elements of the SME relief.
Under the merged scheme, if a company has sufficient profits then tax relief between 15 percent and 16.2 percent of the amount of qualifying R&D expenditure is available depending upon the company’s applicable rate of corporation tax.
Alternatively, as above, if the company makes a loss it can choose to make the deduction above and carry forward the resulting loss or it can instead elect to receive a tax repayment with relief given at an effective rate of 8.7 percent of the R&D costs and uplift.
Research and development tax relief can be extremely valuable for any size company and therefore great care should be taken to review all projects and costs to maximise the claim. Companies are required to inform HMRC of their intention to make a claim within six months after the end of the accounting period to which it relates and this notification must be submitted prior to the claim itself so it is important to take advice at a timely stage.
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