Research and development tax credits
Research and development (R&D) tax credits are a company tax relief which can either reduce a company’s tax bill or, for some small or medium sized companies, provide a cash sum.
The aim of the tax credits is to encourage greater R&D spending in order to promote investment in innovation. By early 2006 about 22,000 claims had been made, just over 19,000 of which were made under the SME scheme and just under 3,000 of which were made under the large scheme, amounting to almost £1.8 billion of support claimed through both schemes. To find out whether you can benefit, read the further information below.
The R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. Companies which are SMEs can, in certain circumstances, surrender this tax relief to claim payable tax credits in cash from the HM Revenue & Customs.
Small or medium sized companies and their advisers can get information about the scheme specifically aimed at them in the guide 'Research and development tax credits for small and medium sized companies'. This guide includes information on how the scheme works, what can be claimed, how to claim, some common errors to avoid and a number of tools to make claiming easier.
Full details of the R&D tax credit legislation are provided in HM Revenue & Customs' Corporate Intangibles Research and Development (CIRD) manual. Below is a brief overview of the main features of the scheme. The overview below is intended as an introduction and should not be taken as an authoritative statement of the law; more detail is provided in the CIRD manual and the relevant legislation.
If you are involved in R&D you may also be able to claim R&D capital allowances (see the Capital Allowances manual for further details). Additionally you may wish to visit the Business Link Business Support Directory, or the DTI's R&D web pages, where information is available on the range of Government support, including grants, for innovation and science.
Contents
- Who can claim R&D tax credits?
- What is R&D for tax purposes?
- What costs qualify for the R&D tax credit
- How much can a company claim?
- When will the company receive the tax relief or cash payment?
- What are the differences between the SME scheme and large company scheme?
- How is a SME and a large company defined?
- When did the schemes start?
- How can the R&D tax credits be claimed?
- Where can I get more information?
- What information is available on the internet?
Who can claim R&D tax credits?
Only companies can claim. There are two schemes depending on whether the R&D is carried out by
- a small or medium company (SME), or
- any company other than a SME (a large company).
What is R&D for tax purposes?
R&D is defined by reference to DTI Guidelines. Broadly, these guidelines provide that a project which seeks to, for example,
(a) extend overall knowledge or capability in a field of science or technology; or
(b) create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
(c) make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
(d) use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)
will be R&D for tax purposes if the project seeks to achieve an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.
What costs qualify for the R&D tax credit
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.
There are special rules regarding expenditure on sub-contracted R&D which differ between the SME and large company schemes. And there are rules which mean that in some cases projects which benefit from a subsidy or grant may have the amount of qualifying expenditure reduced.
How much can a company claim?
Claims can only be made in respect of the qualifying expenditure detailed above. Claims are made by reference to a company’s accounting period. There must be qualifying expenditure of at least £10,000 on R&D in the accounting period in order for a claim to be made. There is no upper limit on the amount of the claim.
The R&D tax credit works by allowing companies to deduct 150% (under the SME scheme) or 125% (under the large company scheme) of qualifying expenditure on R&D activities when calculating their profit for tax purposes.
SMEs may be able to claim payable tax credits in cash from HM Revenue & Customs if they have losses in the accounting period. The payable tax credit could amount to £24 for every £100 of actual R&D expenditure, but the enhanced relief must be surrendered in order to receive this payment.
When will the company receive the tax relief or cash payment?
The tax relief reduces a company’s profit chargeable to corporation tax so this will benefit the company on its usual corporation tax payment date for the accounting period.
The tax credit is paid by HM Revenue & Customs to the company after the corporation tax return containing the tax credit claim is received, unless an enquiry is opened into the return. Where an enquiry is opened interim payments may be agreed. When an enquiry is concluded any balance of the tax credit that is due will be paid.
What are the differences between the SME scheme and large company scheme?
Very broadly the key differences are as follows:
| SME scheme | Large company scheme |
|---|---|
| 150% rate of enhanced deduction |
125% rate of enhanced deduction |
| 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 in certain limited circumstances to certain entities |
| 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 |
How is a SME and a large company defined?
The definition of a SME is that used by the European Commission. Briefly, an SME is a company with fewer than 250 employees, and either annual turnover not exceeding €50M or a balance sheet totalling €43M, and which is not part of a larger enterprise that would fail these tests.
A large company is one which does not meet this definition.
When did the schemes start?
The SME scheme applies to spending after 1 April 2000. The large company scheme applies to spending after 1 April 2002. There have been a number of changes to the rules since the schemes were introduced which have varying commencement dates. The overview given here represents the rules as they currently stand.
How can the R&D tax credits be claimed?
A company claims R&D Tax Credits in its company tax return (form CT600), at the end of its accounting period.
Where can I get more information?
All claims from companies dealt with outside the Large Business Service are handled by specialist R&D tax credit units. These units are organised on a geographical basis, dealing with claims from companies whose main R&D base is within their postcode allocation. You can find a list of the specialist units and the postcodes they each deal with in a Tax Bulletin article published in October 2006. If you have any questions about R&D tax credits the appropriate specialist unit will be happy to help you. You can contact them before making a R&D tax credit claim, or while you are putting together your claim.
What information is available on the internet?
Current information
On 1 November 2006, HMRC announced the setting up of seven specialist R&D tax credit units to handle all R&D tax credit claims from companies dealt with outside the Large Business Service. Details were published in the October edition of Tax Bulletin. A Practice Note has been issued which sets out the approach the new units will take in handling claims (PDF 30K).
On 2 December 2005, HM Treasury and HM Revenue & Customs published 'Supporting growth in innovation: next steps for the R&D tax credit (PDF 314K)'. The document sets out the responses received to 'Supporting growth in innovation: enhancing the R&D tax credit (PDF 605K)', along with the Government's proposals.
Full details of the R&D tax credit legislation are provided in HM Revenue & Customs' Corporate Intangibles Research and Development (CIRD) manual.
Information tailored to SMEs and their advisers can be found in the Research and development tax relief for small and medium sized companies guide.
Guidelines which comprise the definition of R&D for tax purposes are published by the DTI.
The latest National Statistics
on the SME R&D tax credit scheme are now available.
Historic information
The following documents show how R&D tax credits have developed. Most of the information in them is not current. Reference should be made to HM Revenue & Customs' Corporate Intangibles Research and Development (CIRD) manual for current information.
July 2005: 'Supporting growth in innovation: enhancing the R&D tax credit' discussion document
March 2004: Budget note outlining improvements to R&D tax credits
March 2004: Regulatory Impact Assessment for Budget 2004 improvements
December 2003: Summary of responses to ‘Defining Innovation’ and Government proposals
July 2003: ‘Defining Innovation’ consultation document and partial Regulatory Impact Assessment
December 2002: Tax Bulletin Special Edition on R&D tax credits and vaccines research relief
April 2002: Regulatory Impact Assessment for large company and vaccines research relief schemes
December 2001: ‘Designs for Innovation’ consultation document
July 2000: DTI’s superseded guidelines on the definition of R&D for tax purposes
July 2000: Superseded guidance on SME R&D tax credits scheme
March 2000: Regulatory Impact Assessment for SME scheme
January 1999: Technical Note Research & Development: Definition and appeals
March
1998: Innovating for the Future: investing in R&D consultation document
