Research & Development Allowances
Is your business working on a novel project in science and technology? Well, then here is what you must know.
HMRC has created incentives to encourage UK businesses to invest in innovation by providing cash as a reward to companies for their activities.
Ensure that you claim the capital you incurred for your innovation, as Research and Development (R&D) tax credits can convert your entity.
What Are Research & Development Allowances?
R&D tax relief is one of the many important tax reliefs available to both loss-making and profit-making companies. Research and Development Allowance, also known as RDA, is an incentive provided by the UK Government to stimulate companies to invest in research and development. This is a 100% relief for the first year on capital expenditure for fixed assets incurred by trading companies, individuals, and partnerships. Further, the cost for the calculation should include in the same year. This claim could be a cash payment or a Corporation Tax reduction.
HMRC Definition of Research and Development
“An entity must be undertaking a project to seek an advance in science or technology through the resolution of scientific or technological uncertainties. The advance sought must constitute an advance in the knowledge or capability in a field of science or technology and not a company’s state of knowledge or capability alone”.
Who and What expenditure qualifies for Research and Development?
Companies that develop new products, processes, materials, or services or enhance existing ones are likely to be considered conducting research and development, and there will be tax deductions as well as allowances available. Also, not to forget about the expenses spent on capital assets for R&D activities. You could receive 100% tax relief on them, and there is no limit to the amount you can claim.
Your entity must fulfil three main criteria for this relief:
- Your business should be a limited company incorporated in the UK which is subject to corporation tax (could be in any sector and any size)
- Your business should have conducted qualifying research and development activities.
- Your business should have expenditure related to this project
Qualifying activities for research and development include:
- Developing new products, Processes, or services
- Altering or modifying an existing product, process, or service.
Your research and development may consist of risks when trying to resolve technological uncertainties and uncertainties about the outcome. Even so, you could be eligible for the research and development allowance.
Qualifying expenditures include:
- Cost of buildings in which R&D is performed
- Equipment used to perform the R&D activities such as computers, tools testing equipment, and even cars.
- Staff costs include salaries, pension contributions, employer’s NIC, and reimbursed expenses.
- Costs for subcontractors and freelancers.
- Materials and consumables, including light, heat, and power, are used up or transformed by the R&D process.
- Related software. (Software license fees bought for R&D and a reasonable share of the costs for software partly used in your R&D activities.)
- Cost of clinical trials.
Research and Development Relief based on your business size
There are several types of R & D reliefs, depending on the size of the company. Suppose your company is a small or medium-sized enterprise known as SME where less than five hundred staff are employed. In such a situation, you can deduct an additional 130 % of your costs from your yearly profit that meets the specified legislative requirements, in addition to the standard 100% deduction, for a total of 230 % deduction claim tax credit if the company is losing money. This will be worth up to 14.5 % of the qualifying loss. Suppose your company is a large company where five hundred or more staff are employed or has more than a one hundred million Euro turnover or eighty-six million Euro in gross assets. In that case, your business qualifies for the large company scheme (RDEC).
Considering the tax credits for the above businesses (schemes) when your business is an SME, your businesses have the chance to offset up to 33% of your Research and Development costs against your Corporation Tax or receive this as a cash credit from HMRC. If your business is an RDEC, the tax relief can be up to 12% of the expenditure related to research and development. In other words, you can earn 10p for every £1 spent on qualifying research and development activities.
Steps involved in calculating research and development relief credit
Research and development relief credit is calculated based on the expenses spent on research and development. The following steps are:
- First, you need to identify the qualifying expenditure
- Then enhance it by the applicable rate. This results in ‘enhanced expenditure.’
- Finally, you deduct the enhanced expenditure calculated from your taxable profits or add it to your loss. In this way, you will have a Corporation Tax reduction if you are profit-making or receive a cash credit if you are loss-making. You also have the opportunity to have a combination of both.
R&D tax credits are a form of innovation funding that will help you to transform your business. These can give 100% tax relief on assets spent for which no capital allowances are claimable. And what makes it unique about this relief is that there is no upper threshold on the claimable amount.
To claim the relief, you will have to provide evidence to HMRC to show the company is conducting a qualifying Research and Development activity. The cost must be an item of capital expenditure in nature, and it should be incurred in the relevant period. Also, do not forget that you must claim research and development within two years regarding capital allowance claims.
How can WIS Accountancy help you?
We at WIS Accountancy are resourceful and are backed up with a resolute team that will assist you in understanding R&D tax claims and the more expansive coverage. This will include providing clear guidance on this topic and the procedure to follow to win the claim.
We will assist you in:
- Arranging the necessary documentation.
- Preparing your application.
- Winning the claim.
If you have read this blog and you think you need more understanding or guidance, you can contact us on 0203 0111 898 or drop an email at email@example.com. We will be glad to help.