Research and Development Tax Relief

What is Research and Development Tax Relief?

R&D tax relief is claimable by persons subject to Corporation Tax. Companies making Qualifying Expenditure on R&D can claim under two schemes, the R&D Merged Scheme and the Enhanced R&D Intensive Support, ERIS.

Qualifying expenditure

In order to qualify as R&D expenditure an expense must fit exactly into one of a number of categories HMRC has set. The most common ones are:

• Staffing costs directly and indirectly related to research and development projects.
• Materials, water, fuel and power used directly in carrying out research and development.
• Software purchased and used in the development. This includes costs relating to data, cloud computing and hosting costs.
• 65% of contracted out research and development costs, provided it is reasonable at the start of the contract to assume you intended for R&D to take place. Subcontracting expenditure is only eligible if the work is performed in the UK or, where the work is performed overseas, it is necessary due to conditions that cannot be reasonably replicated in the UK.
• Capital Expenditure is not included, but 100% tax relief may be available for R&D capital costs.

If an expense does not fit into a category it cannot be claimed no matter how vital it may be to the R&D being performed.

What are qualifying indirect activities?

A number of the qualifying categories permit the inclusion of expenses that are only indirectly supporting the R&D process. Typical examples of indirect costs are:

• Scientific information services which are conducted for the purpose of R&D support.
• Indirect supporting activities such as security, administration, finance and personnel, which are undertaken for R&D.
• Training required to support an R&D project.
• Research into new testing or sampling methods.
• Feasibility studies to develop strategic direction of a specific R&D activity.

R&D Merged Scheme

The Merged Scheme is available to all companies engaged in R&D activities.

The scheme provides a taxable 20% credit on qualifying expenditure and may result in a cash credit depending on the company’s individual circumstances. There is a prescribed method.

for applying the tax credit and it is important this is done correctly as it can impact future tax years.

The effective credit rate for most companies is 15%. Companies that only pay tax at the small profits rate, the effective credit rate is 16.2%.

Enhanced R&D Intensive Support, ERIS

To qualify for ERIS, the following conditions must be fulfilled:

1. Fewer than 500 Employees
2. Turnover below €100m or a balance sheet total below €86m
3. The R&D activity must not have been subcontracted to the claimant by another party
4. The company must be loss making before accounting for ERIS
5. The eligible R&D spend must be at least 30% of the total expenditure

For the first two conditions you must include staff, turnover and balance sheet totals of any linked companies (>50% parent and subsidiaries) as well as a proportion of the same for any partner companies (>25% share holdings).

For the fifth condition, you must include the expenditure of all connected companies as part of the total expenditure.

Eligible companies may deduct an additional 86% of qualifying expenditure when calculating the loss for tax purposes and may claim a repayable tax credit of 14.5% of the surrenderable loss.

Making a claim

Companies can make or amend an R&D claim within two years of the end of the relevant accounting period.

Additional Information Form

Companies submitting an R&D claim must also submit an Additional Information Form (AIF) to HMRC prior to making the claim. The form requires information about the project’s relief is claimed on and details of the key individual responsible.

Claim Notification Form

A mandatory Claim Notification Form (CNF) must be submitted to HMRC if

• • You are claiming R&D relief for the first time; or
  • You haven’t made an R&D Claim within three years.

If required, the CNF needs to be submitted within six months after the end of the accounting period in question. For example, for a company accounting period which runs to 31 December, then the pre notification form needs to be submitted by 30 June.

The CNF includes details such as the Company UTR, Senior Internal R&D contact responsible for the claim, and a summary of the high-level planned R&D activities.

Repayments

Under both schemes, the tax credit is capped at £20,000 plus three times the Company’s total Pay-As-You-Earn (PAYE) and NICs Liability for the year. Any excess amount will be carried forward for use in future years.

An exemption from this cap exists for companies that meet the following criteria:

• The company is creating, preparing to create or actively managing relevant intellectual property that it holds. Companies preparing or conducting R&D will fulfil this requirement so long as the work is mainly performed by employees.
• The total qualifying expenditure incurred for the relevant accounting period on connected Subcontractors and Externally Provided Workers is less than 15% of the qualifying R&D expenditure.

R&D Tax Credits may only be paid directly to claimants. No nominations are allowed for an R&D Tax Credit service provider.