Understanding R&D Tax Credits

R&D Tax Credits refer to forms of Research and Development Relief, which is covered as part of Corporation Tax bills. Companies who are involved in forms of research and development with positive social outcomes can receive cuts in their Corporation Tax, or a tax credit paid in the form of cash. Qualifying for these credits involves both being a Corporation Tax payer, and being eligible as either a Small or Medium Sized Enterprise, or a Large Company. Differences between the two will affect the tax relief available, and how it can be declared and managed in relation to broader research costs and aims:

1 – Different Companies

A Small or Medium Sized Enterprise is defined by having less than 500 employees, and a turnover of less than 100 million Euros. SMEs can now claim tax relief of up to 225% of the rate of Corporation Tax, with matching on £100 spending. The relief rate has increased by 25% since the 1st April 2012, and forms part of the Government’s emphasis on supporting enterprise and development through tax relief and credits rather than direct injections of capital.

Large Company Schemes by contrast require a business that spends at least £10,000 or more a year on Research and Development. An upper limit of this spending was removed from the 1st April 2012, with the rate of tax relief fixed at 130% for £100 matched spending. Eligibility for both companies is also defined by their operation as a going concern. Subcontractors cannot claim the same relief, unless they are defined in their own right as an SME or a large company.

In this way, businesses can either claim a tax relief, or a cash tax credit against the value of the investment made in research and development. This figure may vary depending on the specific budgeting and capital expenditure of the business.

2 – What Counts as R&D?

A research and development project should contribute overall knowledge to society, whether that be for scientific, medical or other reasons. Businesses need to be able to demonstrate what their project is, its specific contribution to knowledge, and what the scientific uncertainties may be, as well as how knowledge is publicly disseminated. Companies also need to register for intellectual property rights over their research.

3 – How to Claim

A claim for R&D tax credits or relief has to be made as part of a company tax return, and is specifically designated by Boxes 99 and 100 for SMEs and larger companies. Detailed information has to be provided on spending, employee costs, sub contracting, materials, clinical trials, utilities, software, and capital expenditure. A company should also declare State Aid for any projects, and the difference in additional expenditure on which claims can be made. Record keeping should consequently be very detailed, and should be incorporated into general accounting practices.

4 – Seeking Further Advice

Many more businesses are eligible for tax credit and relief through R&D schemes than they might realise. As well as scientific and medical research, IT and technology companies can stand to make significant savings on their tax, or receive a major sum. It is best to seek further advice from your accountant or a tax specialist before putting together a claim in time for the next company tax return.