What are R&D tax credits?
Who can claim R&D tax credits?
Why can only companies get tax credits?
What is the aim of R&D tax credits?
What is qualifying R&D?
How do R&D tax credits work?
What is qualifying expenditure for R&D tax credit purposes?
How can my company claim R&D tax credits?
Can company losses increased by R&D tax credit claims be rolled forward?
May I claim R&D tax credits as well as the grant for R&D?
What are the main characteristics of the two R&D tax credit schemes?
Where can I get further information on R&D tax credits?
R&D tax credits are a Government incentive in the form of tax relief designed to encourage businesses to invest more in R&D. They can either reduce a company's tax bill, or for some small or medium-sized companies not in profit, provide a cash sum.
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All companies spending over £10,000 per annum on R&D (as defined for tax purposes) are entitled to a deduction when calculating their taxable profits of
- 150% of qualifying expenditure incurred by small and medium-sized companies, increased to 175% of qualifying expenditure incurred for work undertaken on/after 1 August 2008 and
- 125% of qualifying expenditure incurred by larger companies increased to 130% of qualifying expenditure incurred for work undertaken on/after 1 April 2008.
From 1 August 2008 the SME scheme was extended from companies with up to 249 employees to companies with under 500 employees. Also, companies whose most recent accounts are not produced on a going concern basis will be unable to claim relief, and a cap was introduced to restrict the amount of relief to €7.5 million per R&D project.
The tax credit is not available to individuals or partnerships.
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R&D tax credits work by reducing a company's corporation tax bill, a process that is simple and efficient for companies. Almost all significant R&D activity carried out by SMEs is undertaken by companies.
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The aim of the tax credits is to encourage companies to invest more in business R&D, hence resulting in an improvement in the rate of innovation in the UK. In the six years since their introduction in 2000 more than £2.3bn of support has been given to business R&D through R&D tax credits.
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A basic definition is "work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology". Advances include new or improved products, processes and services.
To qualify for the tax credit, the R&D must be treated as R&D under generally accepted accountancy practice, and fall within the guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry.
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The R&D tax credit works by allowing companies to deduct qualifying expenditure incurred on R&D activities when calculating their profit for tax purposes as follows:
SME scheme: 150% of qualifying expenditure incurred, increased to 175% for work undertaken on/after 1 August 2008. Companies whose most recent accounts are not produced on a going concern basis will be unable to claim relief, and a cap was introduced to restrict the amount of relief to €7.5 million per R&D project.
large company scheme: 125% of qualifying expenditure incurred, increased to 130% for work undertaken on/after 1 April 2008. There must be a minimum qualifying expenditure of at least £10,000 on R&D in the relevant accounting period in order for a claim to be made. There is no upper limit on the amount of the claim.
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Companies can claim R&D tax credits for their revenue expenditure on
- Employing staff directly and actively engaged in carrying out R&D,
- 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.
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A company claims R&D tax credits in its company tax return (Form CT600). For your first claim, you may want to seek professional advice. Full details of the R&D tax credit legislation, including how to claim, are provided in the HM Revenue & Customs Corporate Intangibles Research and Development (CIRD) manual. Alternatively, information can be obtained by contacting the HMRC specialist units for R&D claims or your Local Tax Office Corporation tax team.
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Basically, yes, although there are some restrictions on how those losses can be used and you may want to seek professional advice.
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The Research Project grants and Development Project grants (including Exceptional Projects) given through the Grant for R&D programme are notified State Aids, which means a claim for SME R&D tax credits cannot be made for a project for which one of these grants has been awarded. However, a claim can be made under the 'large company' R&D credits scheme for that project, including R&D funded by this grant, subject to meeting all the conditions generally of eligibility for R&D tax credits.
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Differences between the SME and large company schemes
SME scheme | Large company scheme |
|---|
| 150% rate of enhanced deduction (increased to 175% for work undertaken on/after 1 August 2008 | 125% rate of enhanced deduction (increased to 130% for work undertaken on/after 1 April 2008) |
| Payable credit at £24 for every £100 of qualifying expenditure on R&D | No payable credit |
| Company can claim for expenditure on R&D it sub-contracts to others | Company can only claim for expenditure on R&D it carries out itself, unless it sub-contracts R&D to universities, charities or public sector research establishments |
| 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 | No reduction for grant or subsidy |
| Company must own the intellectual property arising out of the R&D | Company need not own the intellectual property arising out of the R&D |
| A cap of €7.5 million on the amount of relief per R&D project was introduced from 1 August 2008 | There is no upper limit on the amount of a claim |
| From 1 August 2008 companies whose most recent accounts are not produced on a going concern basis will be unable to claim relief | |
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An overview is provided by the DIUS R&D tax credits homepage. This includes updates on developments and links to introductory leaflet and case studies, together with links to various HMRC web pages.
Detailed information about the R&D tax credits is available via the HM Revenue & Customs website. Alternatively, help is available by contacting a tax inspector at your local tax office. Information on what constitutes R&D for tax purposes is contained in the guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry. There are also other sources of advice available, for instance from Trade associations and professional networks, or from company accountants and financial advisers.
You can also use a new interactive tool developed by Business Link in partnership with HM Revenue and Customs and DIUS, which helps a company find out whether it may be eligible for the R&D Tax Credit by answering a simple series of five questions, which takes five minutes.
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