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UK Tax Incentives For Research & Development

UK Tax Incentives For Research & Development
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UK Tax Incentives For Research & DevelopmentThe UK has two types of tax incentive available to encourage spending on research and development: one aimed at SMEs (the SME R&D Relief) and the other intended for large companies (the Research and Development Expenditure Credit or RDE Credit). The characteristics of these incentives are outlined in this post, along with the qualifying criteria.

SME R&D Relief

The SME R&D relief allows companies to deduct an extra 130% of their qualifying costs from their annual profit, on top of the regular 100% deduction, making a total deduction of 230%. A tax credit can also be claimed by loss-making companies, worth up to 14.5% of the surrenderable loss.

The SME R&D relief can be claimed by companies with fewer than 500 employees and a turnover of under €100m or a balance sheet total under €86m.

Research and Development Expenditure Credit

This credit is calculated at 12% of a company’s qualifying R&D expenditure and is taxable. The credit may be used to discharge the tax liability or produce a cash payment, depending on whether the company is profit or loss-making. This credit can also be claimed by SMEs and large companies who’ve been subcontracted to do R&D work by a large company.

A proportion of staff costs can be claimed from the date the project commences until a discovery is made or the project stops, including salaries and wages, Class-1 National Insurance contributions, and pension fund contributions. Only costs related to staff working directly to support the project can be claimed.

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Qualifying Criteria

An R&D project may research or develop a new process, product or service or improve on an existing one. However, the project must be intended to make an advance in science or technology. It cannot be used for academic or theoretical projects, such as within the social sciences or mathematics.

The project must relate to the company’s existing trade, or one that it intends to start because of the R&D.

To qualify for R&D relief, taxpayers must show how a project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • couldn’t be easily worked out by a professional in the field

 

 

 

Further information may be obtained from the Department of Business Innovation & Skills publication - Guidelines on the Meaning of Research and Development for Tax Purposes

Applicants must be clear that the project aims to create an advance in the overall field and not just for the business in question. Existing technology used for the first time in the company’s sector does not qualify as an advance. However, the process, product or service can still be an advance if it has been developed by another company but isn't publicly known or available.

As mentioned, a key element of the qualifying criteria is being able to show uncertainty. This means that the R&D should relate to something not known to be scientifically or technologically feasible when a discovery is made. Applicants will also need to show that the R&D was actually needed to overcome the uncertainty.

Making A Claim

A company can make a claim for R&D relief up to two years after the end of the accounting period it relates to. The relief is claimed by entering the relevant expenditure information on the full company tax return and a mechanism of advance assurance exists where a report is submitted to HM Revenue and Customs.  All claims under the Self Assessment system must be adequately documented.

UK Holding Companies Whitepaper

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