Research and Development pays off for engineering and manufacturing companies
Research and Development really pays. We mean that in a literal sense because did you know that many UK based Process Industry businesses could be in line for R&D tax relief? Read on to find out how.
Research and Development Relief is a Corporation Tax relief that might just help to slash your company's tax bill. Or if you're an SME (more about the qualifying criteria later) you can claim a cash lump sum in the form of a tax credit. As long as you're liable to pay Corporation Tax, there's a possibility of claiming a welcome windfall.
There are two schemes for claiming relief, depending on the size of the company:
The Small and Medium-sized Enterprise Scheme
The Small and Medium-sized Enterprise Scheme has higher rates of relief according to HM Revenue and Customs (HMRC). They say, “From 1 April 2012, the tax relief on allowable R&D costs is 225% - that is, for each £100 of qualifying costs, your company or organisation could have the income on which CT is paid reduced by an additional £125 on top of the £100 spent. It also includes a payable credit in some circumstances.”
It's worth noting that you can only claim under the scheme for SMEs if your company meets the definition of an SME for R&D Relief purposes.
What is an SME for R&D Relief purposes?
You might be surprised to learn that HMRC defines an SME as a company with fewer than 500 employees and either of the following:
- An annual turnover not exceeding €100 million
- A balance sheet not exceeding €86 million
You may not be considered to be an SME if you form part of a larger enterprise. You'll need to mention any company with a 25% stake in your business. Similarly, you'll have to declare any shareholdings you might have in another organisation.
The Large Company Scheme
The annual £10,000 qualifying R&D costs have been removed for accounting periods ending on or after 1 April 2012. According to HMRC, “From 1 April 2008, the tax relief on allowable R&D costs is 130% - that is, for each £100 of qualifying costs, your company or organisation could have the income on which CT is paid reduced by an additional £30 on top of the £100 spent.”
Which R&D projects might qualify for Relief?
Ok here's the rub. You can only claim R&D Relief if a project
“seeks 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.”
So large-scale advancements rather than incremental gains.
Costs that qualify for R&D Relief
If your company and project both meet the criteria, you can claim tax relief on revenue expenditure. “Generally, this means costs incurred in the day-to-day running of the business - not capital expenditure on assets,” say HMRC.
This can include:
- Employee costs - Staff employed directly by you who are actively engaged in carrying out R&D specifically.
- Staff providers - paying a staff provider for staff who are directly and actively engaged in carrying out R&D.
- Materials - consumable or transformable materials used directly in carrying out R&D.
- Payments to clinical trials volunteers - the cost of relevant payments to subjects of clinical trials.
- Utilities - power, water, fuel used directly in carrying out R&D.
- Software - computer software used directly in the R&D.
- Subcontracted R&D expenditure - if you're claiming relief under the SME Scheme, you may be able to claim back 65 percent of spend on certain R&D activities carried out by a subcontractor.
For more information visit the HMRC website.
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