There are two schemes of relief available to companies in the UK, depending on whether they are a small or medium sized enterprise (“SME”) or a large company.
Small And Medium Sized Enterprises
An SME is a company or organisation with fewer than 500 employees and either of the following:
An annual turnover not exceeding €100 million; or
A balance sheet not exceeding €86 million
The company or organisation may not be considered an SME if it is part of a larger enterprise that, taken as a whole, would not meet the SME test.
For the SME scheme, the company must be a going concern and relief on qualifying expenditure is available at the 225% rate to reduce the profits for corporation tax purposes. The loss may be surrendered under the group relief provisions or can be carried forward and relieved against future trading profits.
An SME may elect to claim any qualifying pre-trading expenditure in the form of a deemed trading loss equal to 225% of the qualifying expenditure.
Insofar as any loss remains unrelieved, the company can use all or part of the loss to claim a tax credit of currently 11% and receive a repayment of other taxes suffered e.g. PAYE. The cash refund is uncapped in relation to accounting periods ending on or after 1 April 2012.
For large companies, an enhancement of 130% is available on qualifying expenditure to reduce profits for corporation tax purposes.
“Above The Line” R&D Credit
“Above the Line”, or “ATL”, introduced by the Finance Act 2013, is a new approach for the relief available to large companies for expenditure incurred after 1 April 2013. ATL provides companies relief by offering a 10% credit for qualifying R&D expenditure incurred.
ATL will replace the current system of R&D relief for companies for expenditure incurred after 1 April 2016. Should a company select this form of relief for expenditure incurred before 1 April 2016, then it will not be able to revert to the enhanced relief system.
Large companies are permitted to claim relief for certain vaccine related R&D.
What Is A Qualifying R&D Project?
To qualify, the R&D project must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty - and not simply an advance in its own state of knowledge or capability. In addition, the project must be related to the company’s trade - either an existing one, or one that the company intend to start up based on the results of the R&D.
Costs Qualifying For R&D Relief
The following revenue expenditure incurred on a qualifying R&D project will qualify:
Employee Costs. Staff employed under a contract of employment who are actively engaged in carrying out R&D.
Materials. Consumable or transformable materials used directly in carrying out R&D. Telecommunication or data costs are excluded.
Payments To Clinical Trials Volunteers. The cost of relevant payments to subjects of clinical trials.
Utilities. Power, water, fuel used directly in carrying out R&D.
Software. Computer software used directly in the R&D.
Subcontracted R&D Expenditure. There is restricted (30% enhancement) relief available for the costs of certain R&D activities carried out for the company by a subcontractor.
Cap On The Available Relief
An upper limit of €7.5 million on the total amount of relief applies to any one R&D project.
Capital Expenditure - Research & Development Allowance
The Research and Development Allowance (RDA) gives relief for capital expenditure at a rate of 100% on R&D that is incurred by a trading company that is related to its trade.
Eligible R&D expenditure includes capital expenditure incurred for:
Carrying out the R&D; and
Providing facilities or assets used by the company’s employees for carrying out R&D.
Expenditure incurred to acquire rights in R&D or rights arising out of R&D are excluded.
Claims must be filed within two years of the end of the accounting period to which it relates.
Disclaimer: Please note that this commentary does not purport to be a comprehensive review of the UK tax treatment on the R&D relief scheme. Detailed appropriate advice should always be obtained where application of R&D reliefs are being considered.