The Capital Allowances Partnership Limited |
Saving Tax On Property |
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R&D Tax Relief/Credits & Capital Allowances
For more information see The R&D tax Relief Partnership
Research and development (R&D) tax relief is intended to drive UK productivity by encouraging innovation. Two types of relief are available:
- R&D tax relief/credits (for revenue costs, that is expensed through the profit and loss account), and
- R&D capital allowances (for capital expenditure, that is recorded on the balance sheet).
Defining R&D for tax purposes is complicated and can produce some surprising results. Many businesses are clearly heavily involved in R&D, but the relief is by no means restricted to high-tech and pharmaceutical industries and with our expert advice many taxpayers have been able to identify valuable R&D activities and tax deductions, where they previously believed that none existed (for example, manufacturers, software, banking and telecommunications industries etc.).
Unlike many other advisers our R&D tax incentives experience goes back long before 2000 when the R&D tax relief/credits rules were introduced. This is because R&D capital allowances had existed for many years previously and R&D tax relief/credit advice was a natural extension of our capital allowances expertise. Our publications also include extensive material on R&D tax incentives.
The definition of R&D for tax purposes has recently been updated. The key aspect is whether there is an appreciable element of innovation (as defined by Government) and it is important to ensure that commercial exploitation of the technology has not started, which can be difficult to determine in practice. We are highly experienced at this. Two types of relief are available:
R&D tax relief and credits are available to companies for expenditure of a revenue nature (that is, expensed through the profit and loss account) on R&D activities related to a company’s trade.
Subject to the detailed rules, this can include expenditure on:
- staff costs (i.e. salaries etc.),
- consumable items (i.e. materials or equipment consumed during the R&D process),
- software used in the R&D,and
- payments to externally provided workers/sub-contractors carrying out R&D for the business.
Expenditure of this nature is particularly valuable because:
- For small and medium sized enterprises (SMEs):
- If the business has no taxable profits to set a tax deduction against, an immediate cash repayment (called a "R&D tax credit") may be claimed from HM Revenue of up to £2,450 for every £10,000 spent on R&D (subject to some associated limits), even if no corporation tax has been paid;
- Or if the business is profitable, the after-tax benefit is a 15.75% or 21% return with generally immediate payback;
- This arises because a 175% super-deduction is available in the year the money is spent (i.e. the full expenditure incurred, plus a 75% uplift). To illustrate, £100,000 of qualifying R&D expenditure would generate an additional £75,000 tax deduction (that is £100,000 x 75%), which will save tax of £15,750 at the current 21% small companies' corporation tax rate or £21,000 at the 28% full corporation tax rate;
- Before 1 August 2008 the return was 10% or 15%. This was because a 150% super-deduction was available in the year the money was spent (i.e. the full expenditure incurred, plus a 50% uplift). To illustrate, £100,000 of qualifying R&D expenditure would generate an additional £50,000 tax deduction (that is £100,000 x 50%), which would save tax of £10,000 at the Financial Year 2007 20% small companies' corporation tax rate or £15,000 at the 30% full corporation tax rate.
- For large companies:
- The after tax benefit is a 8.4% return with generally immediate payback;
- This is because a 130% super-deduction is available in the year the money is spent (i.e. the full expenditure incurred, plus a 30% uplift). To illustrate, £100,000 of qualifying R&D expenditure would deliver an additional £30,000 tax deduction (that is, £100,000 x 30%), which will save tax of £8,400 at the current 28% full corporation tax rate;
- Before 1 April 2008 the return was 7.5%. This was because the super-deduction was 125% and the full corporation tax rate was 30%;
- However, there is no facility to surrender a loss for a cash payment like the SME scheme.
Until 31 March 2008 there was an opportunity to remedy missed R&D tax relief claims before the six year time limit to claim R&D tax relief was reduced to only two (to match the time limit for claiming the R&D tax credit). For accounting periods ended after 31 March 2002 but before 31 March 2006 any R&D tax relief claims had to be made by 31 March 2008. Therefore, it was essential that companies should ensure their R&D tax relief claims are up to date or any tax relief would be permanently lost.
From 1 April 2008 the window to claim is two years from the end of the accounting period in which the R&D expenditure was incurred.
Research and development capital allowances (RDAs) are available for expenditure of a capital nature on R&D related to a company’s trade, e.g.:
- laboratories,
- other research facilities,
- research equipment and
- company cars etc.
RDA’s are particularly valuable as the expenditure is wholly tax-deductible in the year the money is spent, by providing 100% capital allowances. Furthermore, they are available for all expenditure incurred on R&D facilities (except land), including ‘building’ or ‘premises’ assets which would not otherwise qualify for plant and machinery allowances.
