Tax relief for research and development costs

The relief that is available depends on whether the company is a small or medium-sized enterprise (SME) or a large company.

SME scheme

The SME scheme is open to companies that have less than 500 employees and whose turnover is less than €100 million or whose balance sheet is under €80 million. A company is only eligible to claim relief under the SME if it is a going concern and not in administration or liquidation at the time that the claim in made.

Rate of relief

Under the SME scheme, companies can deduct 230% of their R and D expenditure when computing their profits for corporation tax purposes. This means that for every £100 of qualifying R & D expenditure, the company can deduct £230.

Tip

R & D tax relief is very generous and companies should claim if eligible.

Example

Research Ltd is an SME. In the year to 31 December 2016 it has turnover of £500,000. It incurs R and D expenditure of £100,000 and other expenses of £80,000.

It is eligible for R and D tax relief.

If the company fails to claim the relief, its taxable profit would be £320,000 and the associated corporation tax liability would be £64,000.

However, by claiming R and D tax relief, the company is able to claim a further deduction of £130,000 (£100,000 @ 130%), reducing the taxable profits to £190,000 and the corporation tax bill to £38,000. Making the claim saves tax of £26,000.

Tip

R & D tax relief is very generous and companies should claim if eligible.

Losses

If, after making a claim for R and D tax relief, the company makes a loss, the loss can be carried forward or backwards as usual.

However, the company also has the option to convert the qualifying R and D expenditure into R and D tax credits.

R & D tax credits

R and D tax credits enable companies that cannot utilise the R and D tax relief because they have not made a profit to convert their R and D expenditure into a cash sum. The tax credit is paid at a rate of 14.5% of the enhanced amount (i.e. 230% of the actual expenditure). This is equivalent to a repayment of 33.35% of the amount spent on qualifying R and D. In the above example, if the company was loss making it would be able to claim a cash sum of £33,350 ((£100,000 x 230%) x 14.5%).

Tip

Loss making companies can convert the relief into a cash sum.

Qualifying R & D

The definition of R & D is wider and occurs where a company is engaged in a project that is seeking to make an advance to science or technology through the resolution of scientific or technological uncertainty.

Trap

It will not always be obvious whether a company qualifies for relief, leading to missed opportunities for relief.

Tip

HMRC offer an advance assurance scheme so companies can check in advance whether their project qualifies.

Claiming

The relief must be claimed within two years of the end of the accounting period to which it relates.