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R&D Relief - Are You Missing Out?

09 January 2012

Research and development relief (R&D) is a corporation tax relief that could, provided certain qualifying conditions are met, help a lot of companies reduce their tax liability or even (for small and medium sized enterprises, SMEs) give rise to a tax credit (cash repayment).  It doesn’t just apply to ‘test tube’ companies but can instead apply to any company in any sector which addresses a challenge in seeking to improve its products, processes or services. 

The additional tax-relief received by our clients from R&D claims already exceeds £1,000,000!

However, many companies still do not realise that they are undertaking projects which could qualify for relief, so if you are in any doubt, please contact us to discuss.

Qualifying R&D Projects

Examples of projects where additional R&D tax-relief was successfully claimed include:

A company investigated how it could scale buildings other than by using scaffolding.  They designed a system of nets and ropes which was much more efficient. 

A bakery’s morning rolls wouldn’t stop rising which resulted in significant wastage.  After checking the recipe and various other measures it was discovered that the problem was that the room temperature was too high which was causing the yeast to keep on rising.  The costs involved in researching and solving the problem qualified for R&D purposes.

A manufacturer of glass cabinets was asked to construct a curved, airtight case to house museum antiques and relics.  This had never previously been attempted by the glass manufacturing industry.

A cattle slurry provider dealt with various problems recycling and preparing slurry for the agricultural industry.  When cattle slurry is stored in large tanks over time the slurry builds up a thick crust which needs to be broken down before spreading.  The company experimented with the development of a non-toxic and non-corrosive treatment to soften the crust.  In addition they managed to reduce the toxicity and corrosiveness of the slurry.

And finally, as a national instrument, bagpipes are played a lot in Scotland and require a lot of ‘wind’ to achieve their unique sound!  While blowing into the chanter, warm air and subsequently condensation and saliva easily build up and can have a detrimental impact on the sound quality.  One bagpipe manufacturer developed a saliva drainage system to help drain the saliva more efficiently and guarantee a more consistent sound quality with R&D tax-relief being successfully claimed on this expenditure.

Other R&D activities might include projects to:

  • Enhance a taste by improving a recipe.
  • Develop new components in a manufacturing process.
  • Alter a process to extend shelf life or speed up production.
  • Improve packaging materials.
  • Reduce the energy or consumables used in a manufacturing process.
  • Alter methods of transporting goods to avoid problems or wastage.

 

Qualifying Costs

Qualifying costs include:

  • Employee costs
  • Subcontractor work (but relief may be restricted)
  • Software (eg the cost of Word and Excel packages that R&D staff use to record results)
  • Consumable items

 

There is currently a rule that, in order to qualify for R&D relief, the company must have incurred more than £10,000 of qualifying costs in the relevant accounting period.  There is also a rule that the amount of payable tax credit to SMEs is capped at the amount of PAYE/NIC paid by the company in the period.  Both of these restrictions are to be abolished from 1 April 2012.

The Reliefs

The reliefs available depend on the size of the company for R&D purposes. 

Small and Medium Companies

There are 3 ways for SMEs to get tax relief for R&D expenditure:

  • Enhancement Relief – the company is entitled to deduct 200% (from 1/4/11, expected to rise to 225% from 1/4/12) of the qualifying revenue R&D costs from taxable profits (100% by allowing the costs that are included in the company’s Profit & Loss account and an additional 100% by adjustment in the tax computation).
  • Tax Credits – where the company makes trading losses following a claim for enhancement relief, the company may be able to surrender the enhanced loss in return for a 12.5% tax repayment (reducing to 11% from 1/4/12).
  • R&D Capital Allowances – the company is entitled to claim a 100% ‘first year’ allowance for qualifying capital R&D costs.

 

Large Companies

Large companies can claim enhancement relief of 130% (ie an additional 30% on top of the amount charged to its Profit & Loss Account) on qualifying revenue R&D costs.  However, they are not entitled to tax credits.

Other Issues

Subsidies - Consideration will need to be given to the effect of any subsidies/grants received in respect of the R&D project on the R&D enhanced tax reliefs.

Documentation - When making an R&D claim, it will be important to maintain good records to back up both the nature of the project and expenditure incurred. 

The above article is intended as a general summary of current tax legislation.  Springfords LLP accept no liability for any loss arising from anyone acting on it.   Advice should be sought in relation to your company’s particular circumstances.  For more detailed information on the above please contact DLochhead@springfords.com or your usual Springfords advisor. 

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