QUESTION: I regularly get approached by R&D firms to say my company should be making an R&D tax claim to reduce our corporation tax bill. What are the qualifying conditions for making a claim and how much CT could we save?
ANSWER: Research & development (R&D) tax reliefs can sound too good to be true, however it was introduced to incentivise innovation across all sectors to make UK businesses competitive on the global stage.
Before making a claim, it is important to ensure that the company’s activities meet HMRC’s definition of R&D. There is widespread misunderstanding as to what is meant by R&D in the context of obtaining tax relief, qualifying projects must aim to create an advance in the overall field, not just for your business.
This means an advance can’t just be an existing technology that has been used for the first time in your business. The R&D must be work which aims to ‘breaks new ground’. This may be in pursuit of the creation or development of, for example, new substances, materials, designs, processes, technology or knowledge. The work must be “innovative”, periodic alterations to existing products or processes, even though these may represent some improvement, are unlikely to qualify.
A key characteristic of a qualifying R&D project is the uncertainty, at the start of the project, whether you will be able to achieve the desired outcome. You should be researching or developing something that isn’t known to be scientifically or technology feasible. Qualifying R&D projects usually take a considerable amount of time to carry out the R&D i.e. any uncertainties cannot be readily deducible by a competent professional in the field.
The R&D tax reliefs allow companies to claim additional tax savings on the qualifying costs they incur. The amount of CT that can be saved will depend on which of the two types of R&D claims in made; the SME or RDEC scheme. The scheme your company can make a claim under will depend on the size of your company and whether the projects have been subsidised by State Aid grants. Each scheme operates slightly differently but can be summarised as follows:
• An SME claim creates a 230 per cent deduction against Taxable Profits, i.e. a £437 tax saving for every £1,000 qualifying spend.
• An RDEC claim creates a 13 per cent taxable Tax Credit against Tax Liability, i.e. a £105 tax saving for every £1,000 qualifying spend.
The above demonstrates that the SME scheme is more generous, however, it is only available to projects not subsidised by State Aid grants and companies who meet the Small and Medium-sized limits i.e. has less than 500 employees and either a turnover of less than €100m or a balance sheet of less than €86m.
Eligibility for R&D tax relief is through qualifying activities, rather than a specific industry or sector. In reality, successful claims have been made by a wide range of industries including digital technology, manufacturing, architecture, engineering, pharmaceutical, digital technology, food, ICT, construction and renewable energies, to name a few. Typical aims of R&D projects are those trying to create efficiencies, reduce wastage, reduce environmental impact, improve performance, etc.
Specific guidance should be taken to ensure that your projects are qualifying as R&D and you are capturing all qualifying costs to maximise the tax relief or cash repayment available in respect of your claim.
:: KellyAnne Murtagh (k.murtagh@pkffpm.com) is senior manager at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
