Nigel Holmes, Director of Corporate Tax at Armstrong Watson, sheds light on research and development tax relief available to businesses.
There is a misconception that research & development tax relief is only available to companies that have scientists in laboratories. However, any company that has made an advance in science or technology could be able to make a claim.
The relief offered is very generous and can often result in cash back from HM Revenue & Customs, rather than a company paying over Corporation Tax. Recently published statistics show that it is likely the relief is massively underutilised as only 1,210 North West companies made claims in 2011/12 in respect of £60m qualifying costs. This may be due to a lack of awareness or a belief that what companies are doing doesn’t qualify.
In order to be eligible to make a claim for research & development tax relief, a company must have overcome some uncertainties that resulted in an advance in science or technology in their field, not just their own knowledge. From our experience this allows many different industries to take advantage of the relief and save themselves tax, just by carrying out their day to day tasks. We have had successful claims in engineering, manufacturing, nuclear science and medical research to name a few.
There are different R&D schemes depending on the size of the company, although the majority of claims that we deal with fall within the SME scheme as the definition of SME is very generous. Of the 1,210 claims made by North West companies, 995 were within the SME scheme, who incurred £29m qualifying costs.
The SME relief works by allowing an additional deduction from a company’s taxable profits by enhancing the deduction for qualifying expenses. The current large company scheme also works in the same way, although this is being phased out slowly to be replaced by an alternative scheme. Under the SME scheme the additional deduction for expenditure is 125% and for the large scheme it is 30%. This is clearly very generous and should be utilised wherever possible. Over £8billion of relief has been granted across both schemes since they were introduced.
From April this year a new large company scheme has also been introduced which allows for a deduction of the qualifying R&D expenditure above the profit line within the accounts. This adjustment is also reflected in the tax computation and reduces the tax payable. Under the SME scheme and the new large ‘above the line’ scheme a company can also claim a tax credit from HMRC if they are in a loss making position. This is done by surrendering losses that would otherwise be used in future periods to get a cash sum now.
Another common misconception is companies in receipt of state aid funding cannot claim the tax relief in addition to the grant. As the SME regime is state aid itself a company cannot claim the SME uplift but the rules allow a claim under the large scheme instead in these circumstances, so companies can have both grants and tax relief for the same project.
R&D relief is based on the expenses incurred in order to make the advance, and from April this year there is now a relief that enables companies to get relief on the profits made from their intellectual property. The Patent Box allows for a reduced rate of Corporation Tax on the profits made from patented products; once fully phased in the Corporation Tax on such profits will be just 10%. The Patent Box regime must be considered carefully as it must be opted into and depending on the company’s own position this may not be the most beneficial thing to do. However, any company that owns patents should at least consider this new relief.
Armstrong Watson, a partner of the Business Growth Hub, has made hundreds of successful claims saving our clients huge sums in tax and generating significant cash sums, often having overcome the many misconceptions referred to above. To discuss these reliefs on a no obligation basis, you can email or visit the website for more information.