R&D Tax Credits

A brief overview of R&D Tax Credits for SMEs

NB This is NOT a definitive guide. Please refer to HMRC and weblinks for more detail. 
 
Who can claim R&D tax credits? 
Only Limited companies can claim – not sole traders or partnerships. There are two schemes depending on whether the R&D is carried out by a small or medium company (SME), or any company other than a SME (a “large company”).  
 
How are a SME and a large company defined? 
For the purposes of R&D relief a SME is a company which meets the normal conditions specified in the EU SME definition, except that it may have up to 500 staff, turnover up to €100m and balance sheet total up to €86m (i.e. all double those of the normal SME definition) and which is not part of a larger enterprise that would fail these tests. (See CIRD91900.) A large company is one which does not meet this definition. Note that there are issues around linked companies and those where >=25% of the shareholding is held by others, especially university spin-outs, so get expert advice on this. 
 
What is R&D for tax purposes?  
R&D is defined by reference to DTI Guidelines, but it must address an issue of scientific or technical uncertainty. Note that a commercial project may contain one or more R&D projects. It is only the costs of the eligible R&D projects that will qualify. Broadly, these guidelines provide that a project will be R&D, for tax purposes, if the project seeks to achieve an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.  

(Note: Hence if a professional working in the field would know that say, a company in this sector in Japan is already doing it, the UK company’s project would probably not be eligible. The company may need to do a search for IP of this sort, and the costs of that would probably not be reclaimable on R&D Tax Credits.)  
 
An eligible project could be one which seeks to, for example: 

(a) extend overall knowledge or capability in a field of science or technology; or 
(b) create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or 
(c) make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or 
(d) use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner.)  
 
What costs qualify for the R&D tax credit? 
Companies can claim R&D Tax Credits for their revenue expenditure once they have achieved a minimum of £10K (£10k limit expected to end after 1 April 2012) of eligible spend during the company’s 12 month accounting period (pro-rata if AP less than 12 months). Eligible spend is mainly remuneration, subcontract costs* and consumables- e.g. 
  • Remuneration of staff employed directly and actively engaged in carrying out R&D, usually excluding Directors unless they are actively involved in research. 
  • paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D,  
  • consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and power, water, fuel and computer software used directly in carrying out R&D.  
*There are special rules regarding expenditure on sub-contracted R&D which differ between the SME and large company schemes. And there are rules which mean that in some cases, projects which benefit from a subsidy or grant may have the amount of qualifying expenditure reduced. 
 
How much can a company claim?    
Claims are made by reference to a company’s Accounting Period (AP). There is no upper limit on the amount of the claim. SME companies can deduct 200% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. (225% from April 2012 subject to Parliamentary approval.) 

If they have losses in the accounting period, SMEs may be able to claim payable tax credits in cash from HM Revenue & Customs, up to the amount of PAYE/NIC paid for the AP. The payable tax credit could amount to 25% of actual R&D expenditure (or 12.5% of enhanced expenditure; CIRD80250 refers), but the enhanced relief must be surrendered in order to receive this payment - i.e. the company cannot later use this loss to offset profits made in later years.  All claims for this payable tax credit in cash must be made within 2 years of the end of the AP.  
 
When will the company receive the tax relief or cash payment? 
On its usual corporation tax payment date for the accounting period, as the tax relief reduces a company’s profit chargeable to corporation tax. The tax credit is paid by HMRC to the company after the corporation tax return containing the tax credit claim is received, unless an enquiry is opened into the return. Where an enquiry is opened, interim payments may be agreed. When an enquiry is concluded, any balance of the tax credit that is due will be paid. 
 
What are the differences between the SME scheme and large company scheme? 
If a SME is not eligible under the SME scheme (e.g. because they have had other EC grants, like R&D Grant) they may still be eligible to apply under the large company scheme (contact an HMRC R&D unit for details) Very broadly the key differences are as follows: 
 
SME scheme Large company scheme
175% rate of enhanced deduction (pre April 2011 see next) 125% rate of enhanced deduction (130% from March 2008)
Click here for further details - became 200% in 2011 heading for 225% in 2012 No changes planned that I know of

Payable credit at £24 for every £100 of qualifying expenditure on R&D (CIRD80250 refers).

Company can claim for expenditure on R&D it sub-contracts to others

No payable credit

Company can only claim for expenditure on R&D it carries out itself, unless it sub-contracts R&D in certain limited circumstances to certain entities

Company cannot claim for contributions to independent research Company can claim for contributions to independent research

Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it (see CIRD81650 re State Aid)

Company need not own the intellectual property arising out of the R&D (abolished from 9th December 2009)

No reduction for grant or subsidy

 

Company must own the intellectual property arising out of the R&D

 
When did the schemes start?  
The SME scheme applies to spending after 1 April 2000. The large company scheme applies to spending after 1 April 2002. There have been a number of changes to the rules since the schemes were introduced which have varying commencement dates. The overview here represents the rules as they currently stand. 
 
How can the R&D tax credits be claimed?  
A company claims R&D Tax Credits in its company tax return (form CT600), at the end of its accounting period. All R&D Tax Credits must be claimed within 2 years of the AP end. To get everything sorted out and claimed correctly by 31 March 2012, companies probably need to start the process in January 2012. 
 
What information is available on the internet?  
There are detailed explanations and instructions on these sites whilst a flowchart they used to have is sadly no longer there.  
 
Where else can I get more information?  
All claims from SMEs are handled by specialist R&D tax credit units. If you have any questions about R&D tax credits the appropriate specialist unit will be happy to help you. You can contact them before making a R&D tax credit claim, or while you are putting together your claim.  
 
Queries should go to the appropriate R&D unit.

For the Eastern Region contact 
HMRC,
Eastbrook,
Cambridge CB2 8DJ
or
01223 442688 

In London try
Neil Smillie on 0207 147 0864
or
 
To discuss innovation, R&D or technology transfer please contact:
John Christopher
Innovation Adviser
H-Tech and Advanced Engineering  
07799 060400
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Download a copy of this article  273k v. 3 17 Jan 2012, 12:22 Matthew Darroch-Thompson