Don’t imagine that Research and Development tax relief is only available for laboratory-type innovations.
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Research & Development Tax Relief
Why aren’t you applying for this under-subscribed and generous tax relief if your business is contributing to the advance of science and technology? Don’t imagine that Research and Development tax relief is only available for laboratory-type innovations.
It can apply to business expenses where new technologies, materials, knowledge, and ideas are being used to surmount old challenges and tackle some new ones.
Research & Development – Capital Expenditure:
Enhanced capital allowances can be claimed for capital expenditure on research and development. Allowances are only due if the R&D is related to the trade of the business. The allowance is known as the Research & Development Allowance (RDA) and qualifying expenditure attracts capital allowances of 100%.
Stipulations to qualify for R&D Tax Relief
The business is a small company employing less than 500 people.
The business is a limited company or plc.
The R&D by the company must either relate to a trade carried on by the company or be related to something from which trade will derive.
R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade; and medical research that has a special relation to the welfare of workers employed in that trade.
The company must not be in receipt of a notified state aid in respect of the project.
Expenditure must not be subsidized.
The company must not have been contracted to carry out the R&D.
The company must be a going concern (that is, must be solvent).
The R&D project must not receive total aid of more than €7.5 million.
Method of Relief
From 1 April 2015 businesses can claim R&D tax relief of 230% incurred. For expenditure incurred between 1 April 2012 and 31 March 2015, companies could claim 225%. Prior to that, they could claim relief of 200%.
Normally R&D tax relief would be claimed by deducting from taxable profits in the company’s corporation tax accounts, an additional amount equal to 130%, 125%, or 100% of the R&D expenditure, depending on when it was incurred.
A relief at 230% of the expenditure gives businesses liable for the small profits rate of corporation tax at 20% (2016), 19% (2017), a tax saving equal to 46% of the R&D expenditure. That means every £100 you spend of research and development is equal to £33 of tax relief.
Companies that incurred R&D expenses before they started to trade can treat the R&D relief as a trading loss. Again, the rules have changed slightly recently, but here’s another example.
What can R&D include?
R&D according to HMRC is when a project, or a component of a larger project, seeks to achieve an advance in science or technology. This could include:
Software development
Designing new products
Precision engineering
Products using new materials
Enhancing existing products or technologies
What part of the process will R&D expenditures cover?
Staff costs of anyone actively engaged in carrying out R&D itself.
Externally-provided workers and subcontractors, including the cost of paying a staff provider for provision of staff or subcontractors, so long as they’re directly and actively engaged in carrying out R&D.
Consumables, including consumable or transformable materials used directly in carrying out R&D. Note that the Finance Bill 2015 introduced a new restriction, which means relief is only available on the cost of items fully used up or expended by the R&D activity itself, it cannot be put against costs intended to be sold as part of a commercial product.
Revenue expenditure incurred on computer software licenses employed directly in R&D.
Utility Costs, i.e. water or fuel used directly in carrying out R&D, but not for instance telecommunication costs and data costs.
We confirm you’re a limited company incorporated in the UK and are undertaking qualifying R&D activities involving innovation.
We review your accounts to look at your tax position and see what you’ve spent; and we discuss whether or what you intend to spend on qualifying expenditure in the future.
We confirm areas where you are or have made qualifying expenditure and we pinpoint areas where you may not have realized you were about to make or had made qualifying expenditure.
We then work with you on the report to send to HMRC which describes your R&D expenditure.
We amend your corporation tax return (CT600) and incorporate your tax credit calculation.
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