R&D Tax Relief FAQs

Yes, there is the SME Scheme and the RDEC Scheme.

The SME Scheme is generally available to companies that meet the definition for being classified as a small or medium-sized enterprise (SME) - however, see Qn 10 below if you also receive a grant or subsidy towards your R&D expenditure.

The SME Scheme works by giving you an extra corporation tax deduction equal to 130% of your qualifying R&D expenditure.

With a corporation tax rate of 19%, this means that the SME Scheme gives extra corporation tax relief of 24.7% of your qualifying R&D expenditure.

As you already receive 19% corporation tax relief on your qualifying R&D expenditure anyway (because the cost is deducted in your accounts), this means that a claim under the SME Scheme ensures that 43.7% of your qualifying R&D costs are effectively funded by HMRC through corporation tax relief.

Not necessarily - but you have a choice to make.

You can carry-forward your losses (increased by the extra 130% deduction ganed from your SME Scheme relief) or you can choose to 'cash-in' losses in exchange for a cash payment from HMRC.

There are special rules to determine the amount of losses that HMRC will allow you to 'cash-in' and you should be aware that the effective rate of tax relief for cashed-in losses is only 14.5% (not 19%). So, although many small businesses choose to take advantage of this cash-flow benefit, your overall tax relief may be lower in the long-run.

tax4tech can help you make the right decision for your company.

The RDEC Scheme is available to:-

• Large companies.

• SMEs that cannot claim SME Scheme relief on some or all of their R&D costs because they are also receiving a grant or other subsidy (see also Qn 10 re grants).

• SMEs that undertake qualifying R&D as a subcontractor for a Large company.

RDEC stands for 'Research & Development Expenditure Credit'. As the name suggests, the RDEC Scheme works by giving you a corporation tax credit, rather than an additional corporation tax deduction.

The credit is calculated at 13% of your qualifying R&D spend.

However, because the credit is itself taxable the effective rate of extra corporation tax relief is 10.53% not 13%.

When you look at it from a funding point of view, as you already receive 19% tax relief on your costs by deducting them in your accounts, this means that a claim under the RDEC Scheme ensures that 29.53% of your qualifying R&D costs are effectively funded by HMRC through corporation tax relief.

There are special rules to determine how your RDEC is used.

For example, it may be set against other tax liabilities.

Depending on your company's circumstances, up to 81% of your RDEC may be paid to you by HMRC.

To qualify as an SME, you must have less than 500 employees.

In addition, either your turnover must be less than €100m or your balance sheet total must be less than €86m.

However, if you are a member of a group of companies, or have external investors, this can affect your SME status and this will need to be reviewed.

In all cases, tax4tech will check your status to ensure you obtain the correct relief.

To qualify

• A project must seek to achieve an advance in science or technology.

The advance must extend overall knowledge or capability in the particular field of science or technology, not just the company's own state of knowledge or capability. However, where details are not readily available (eg trade secrets) this can qualify.

• Your R&D activities must directly contribute to overcoming a scientific or technological uncertainty where the solution, or method of arriving at the solution, is not readily apparent to an appropriately-skilled competent professional working in the field.

The boundaries of R&D

For R&D Tax Relief purposes, your R&D work starts when work to resolve the uncertainty starts, and ends when the uncertainty is resolved or the work to resolve it stops.

Examples of the type of R&D projects that can qualify

• A project to create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology.

• A project which makes an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes.

• A project which uses science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (eg a product that has similar performance characteristics as existing models, but is built in a fundamentally different manner).

Abortive projects

It is not necessary for the project to be successful in order for it to qualify for R&D Tax Relief.

Examples of the sort of R&D activity that may qualify for R&D Tax Relief

• Design, fabrication and testing of a prototype for a new or improved product or process.

• Developing new materials, composites, components, coatings, bonding mechanisms, packaging etc with enhanced charateristics, for example they are stronger, lighter, more reliable, more durable, more environmentally-friendly, more heat resistant, less flammable or facilitate longer shelf-life.

• Developing bespoke materials, techniques, tools or machinery for specific tasks such as cutting, lifting, binding, assembling etc in unusual or challenging environments.

• Adapting existing products and processes to incorporate improved components or processes.

• Developing improved processes and material handling techniques to increase output, reduce waste, reduce cost, improve flow, improve consistency in quality etc.

• Technical investigation and problem-solving performed by engineers or technicians that goes beyond routine troubleshooting.

• Developing or appreciably improving underlying technologies, software, functionality etc in order to achieve new applications for Machine Learning/Artifical Neural Networks, Virtual Reality, Augmented Reality etc or to integrate emerging technologies with existing processes or platforms.

• Developing new products or processes to comply with new regulations.

• Using or adapting existing science and technology from other industries for new applications.

Qualifying activities can include planning the R&D activities (defining objectives, assessing technological feasibility etc), design, testing, analysis, and management of the project.

Contact us now for a free initial meeting to explore your eligibilty for R&D Tax Relief.

Staff costs

You can claim a proportion of staff costs for those staff working directly and actively on your R&D project.

For this purpose, staff costs include wages and salaries, bonuses, employers' National Insurance Contributions, employers' pension contributions and, in some cases, travel and subsistence costs.

You can claim the cost of materials and other consumables used up in your R&D.

This can include certain utilities.

Software

You can claim the cost of software licences for software used in your R&D activities.

Externally Provided Workers

You can claim 65% of qualifying payments to external agencies who provide staff who work on your R&D project.

Subcontractor costs

You can claim 65% of qualifying payments to certain subcontractors you use for your R&D activities.

[There are some differences in the rules around subcontractors between the SME Scheme and the RDEC Scheme.]

Any cost that does not fall within one of the categories identified above, will not qualify.

This includes rent, rates, production and distribution costs once any R&D has been completed, the cost of patents and trademarks, and capital expenditure.

Where a claim is made under the RDEC scheme, there is no restriction for grants or subsidies received. The R&D Tax Relief claim can be made on the gross qualifying R&D expenditure.

For SMEs, the impact of any grants or subsidies you receive will depend on their EC notification status:-

• If the grant is a 'Notified State Aid' then none of the R&D costs will qualify under the SME Scheme. However, it will still be possible to claim R&D Tax Relief under the RDEC Scheme.

• If the grant is not a 'Notified State Aid' then an SME can claim relief under the RDEC Scheme for the R&D costs covered by the grant, and can also claim under the SME Scheme for the balance of costs not funded by the grant.

Claims must be filed with HMRC within 2 years of the end of your accounting period.