SME R&D relief is available if you are an SME with:
The relief allows you to take an extra 130% deduction of their qualifying costs, in addition to the normal 100% deduction from their yearly profit.
The losses generated are surrendered in exchange for a tax credit at 14.5%.
How do the numbers work?
A company has identified £100,000 qualifying expenditure incurred on its R&D project.
Trading loss pre R&D (100,000)
R&D enhancement (130%) (130,000)
Trading loss post R&D (230,000)
The amount available for surrender for a tax credit is the lower of the R&D enhancement and the trading loss post R&D.
In this case, the company would receive a £18,850 cash payment from HMRC which they can now use to fund R&D within their business.
If you are a large company for R&D tax purposes, then you may be eligible to claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects.
It can also be claimed by SMEs and large companies who’ve been subcontracted to do R&D work by a large company.
The RDEC is a tax credit for 11% of your qualifying R&D expenditure up to 31st December 2017 and 12% from 1st January 2018.
The main difference between the costs which qualify under the RDEC scheme is that subcontracted expenditure cannot be claimed unless it has been directly undertaken by a scientific research organisation i.e. a charity, university, or an individual.
It may still be possible to claim Research and Development Tax Relief for a product, service or process that has already been developed, but the exact details of which is not publicly available or readily deducible.
“If a particular advance in science or technology has already been made or attempted but details are not readily available (for example, if it is a trade secret), work to achieve such an advance can still be an advance in science or technology.”
Whatever size or sector, if your company is taking a risk by attempting to resolve these uncertainties, then you may be carrying out qualifying activity. This could include creating a new process, product or service, but may also include changing or modifying an existing product, process or service in order to make it better.
The R&D tax relief claim must be submitted no later than two years after your accounting year end.
For example, a business with an accounting year end of May 31st 2017 has until May 30th 2019 to claim or lose out.
The R&D claim is quantified based on the time spent on R&D activities in the accounting period. This may be impacted by the start and end date of the R&D project.
The project starts when you begin to identify the technical issues that need to be resolved. The project ends when uncertainty is resolved or the project ceases.
A company created a working prototype following significant research, design and testing, at which point the R&D had ended. The prototype had gone into production and became available on the market.
3 months later, customers found that the product was becoming too slow due to certain functionality being unable to withstand frequent use. This was not something the competent professionals within the company had come across before and due to the bespoke nature of the product, there was no publicly available information that could help resolve the issue.
If this happens, your R&D may restart due to the identification of another technological uncertainty. You can claim for another period of R&D while you try to resolve it.
Jeffreys Henry LLP provide an end-to-end service that makes claiming R&D tax credits easy for you.
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Partner - Corporate and R&D Tax
R&D Tax Manager