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R&D tax relief: rewarding innovation for small businesses

28th November 2013

British chef Sat Bains successfully claimed research and development tax credits last week (£) – and that got us thinking about the implications for all you hard working guys and gals out there.

The double Michelin-star chef secured a groundbreaking pay-off due to the experimentation and innovation in the development kitchen at his Nottingham restaurant.

Until recently, it was unheard of for businesses in the hospitality industry to claim tax relief for innovation but it turns out R&D reliefs are not just claimable by men in lab coats.

Here’s our guide – have a look to see if you might qualify for some money back…

What is R&D tax relief?

To encourage pioneering research in the UK, HMRC introduced a corporation relief on qualifying R&D expenditure by companies. The qualification criteria are as follows:

Your company or organisation can only claim for R&D Relief if an R&D 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.”

The project must also relate to the company’s trade.

For a full clarification of the tax definition see the HMRC website.

Qualifying expenditure

It is only available for revenue expenditure – stationery, wages, utilities etc – not capital expenditure like equipment or vehicles.

However tax relief can be claimed on capital expenditure separately through research and development allowances (allowing 100% tax relief on R&D capital expenditure), so everyone’s a winner!

To qualify, any activity must contribute directly to the project or be a indirect activity that ticks the relevant boxes.

Qualifying costs include:

  • Employment costs for staff directly under contract of employment carrying out the R&D
  • Staff providers
  • Materials consumable or transformable
  • Payments to clinical trials volunteers
  • Utilities – power, water, fuel. Not telecoms or data costs though I’m afraid
  • Software – used directly in the R&D
  • Subcontractor costs – limited to 165% of costs if subcontractor is not connected to the organisation. This only applies to SMEs – see later for a definition. Large companies have further restrictions on the type of work undertaken by the subcontractor that qualifies for relief

How it is applied

The relief is calculated as a percentage of the total of the qualifying expenditure. The percentages are different depending on whether the company is an SME or a large company. How? I hear you ask. Very well then…

Large companies

  • Large companies can only claim a relief of 130% – an extra £30 for every £100 spent
  • If you’ve made a loss during the year, that loss can be increased using the same rules as above
  • There are no spending restrictions (previously companies used to have to spend £10,000 or more)

SMEs

SMEs are defined as companies that have fewer than 500 employees and either (a) an annual turnover less than €100m or (b) a balance sheet not exceeding €86m.

  • SMEs can claim a total relief of 225% of allowable R&D costs – for each £100 spent you can reduce your taxable profit by an additional £125
  • If you are an SME you may have the option of receiving cash instead of increasing your carried forward loss (to reduce future years’ tax)
  • Prior to 31 March 2012, the tax credit payable was limited to the lower of a fixed percentage of the total ‘surrenderable loss*’ or the total PAYE & NI liabilities for that period. Since then, the PAYE restriction has been removed so the tax credit payable – correct as of November 2013 – is 11% of the total surrenderable loss

To cut a long story marginally shorter, if you would prefer cash now then 11% is the golden number – if your company makes a loss, for every £100 you spent on R&D, you can get £11 back.

Dwelling(s)Single household dwelling(s) after conversionMultiple occupancy dwelling(s) after conversionRelevant residential purpose building after conversion
Single household dwelling(s) before conversionNot normally qualifying conversion unless the number of single dwelling households changesQualifying conversion subject to further conditionsQualifying conversion subject to further conditions
Multiple occupancy dwelling(s) before conversionQualifying conversion subject to further conditionsNot a qualifying conversionQualifying conversion subject to further conditions
Relevant residential purpose before conversionQualifying conversion subject to further conditionsQualifying conversion subject to further conditionsNot a qualifying conversion
Any premises not listed above before conversionQualifying conversion subject to further conditionsQualifying conversion subject to further conditionsQualifying conversion subject to further conditions

How to claim the R&D relief

The relief is claimed through your normal company tax return. The time limit for making your claim is up to two years after the end of the accounting period.

For those opting to receive the tax credits back, HMRC will make the payment after they have received your return and undertaken the necessary compliance checks.

If you have requested to have the full qualifying loss there is nothing more to do at this point – just sit back and book yourself a five-star trip to the Bahamas. Or do something more responsible with it – you’ve earned the choice.

*Surrenderable loss – the lesser of the total trading loss for the period or 225% of the qualifying expenditure