Innovative enterprises play a crucial role in the recovery and future success of the UK economy, but some businesses can find it difficult to consistently invest in the Reseach and Development (R&D) activity which underpins their growth.
In recognition of both of these issues, the Government has put in place tax relief for those companies which incur qualifying expenditure on R&D activities, with two different approaches for SMEs and larger corporates.
R&D tax relief provides an enhanced deduction for qualifying costs that can be set against profits. The enhanced deduction for SMEs is 225% of qualifying expenditure and those companies can claim a payable R&D tax credit where the enhanced deduction results in a loss. This isn’t an option for large companies at present, where the tax relief is instead a deduction 130% of qualifying expenditure, reducing taxable profits.
It is usually beneficial to carry your enhanced loss forward if you think you will be able to offset it against profits in the near futrure, because companies pay tax at around 20%, but if you opt for the repayable tax credit, it’s at the lower rate of 11%.
Although the R&D tax relief has been in place for some time, not all eligible companies have taken advantage of it, as they have a perception it doesn’t apply to them. This isn’t always the case, Nolan adds. If you look at the definition of R&D it is broader than you might think. Any company developing new or improved products, processes and systems might be able to qualify.
So, for instance, a factory which wanted to increase efficiencies or improve productivity and created an original process to do this could potentially qualify. The types of expenditure include staff costs of those individuals involved directly in the R&D activity, materials consumed in the R&D process and software employed.
Haines Watts can provide guidance on the scheme to companies which might not be sure if their R&D activity qualifies. Sometimes it may help if we can speak to the Revenue in advance of the claim going in, to agree a methodology. We can also help with developing systems to report the information needed for such a claim.
From April 2013, a 10% “above the line” tax credit will be introduced for R&D expenditure by large companies. This treatment will initially be optional but will become compulsory from 1 April 2016. The ATL credit will be calculated directly as a percentage of the company’s R&D spend.
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