Research & Development tax reliefs for SMEs
- John Deane
- Updated: Wed, 16th Nov 2016
If a company invests in research and development in the UK or abroad, these investments can dramatically reduce taxable profits, and even result in tax repayments from HMRC.
Small and medium companies can now deduct 230% of their research and development expenditure (“R&D”) when calculating taxable profits. If the SME is loss-making, the loss arising from research and development can be exchanged for an immediate repayment from HMRC under the R&D tax regime.
SME R&D relief is particularly useful for start-ups which don’t yet trade. Start-ups can claim the R&D relief as though they were trading if the R&D is related to the intended trade. Importantly, loss-making SMEs can choose to surrender the loss for a repayment generating cash at the start of the business.
R&D is easily lost
SMEs tax relief is not a guarantee.
- HMRC are restricting R&D tax relief for SMEs.
- SME R&D relief has a short life and can be easily lost. It can only be used for expenditure incurred in the previous two accounting periods.
- R&D tax relief is only available for companies, not partnerships or individuals.
Note also the benefits of R&D are not guaranteed. Apart from the tax breaks, consider how to protect the Intellectual Property developed as a result of your research. This commonly includes trademark registration, patents and design registration.
What companies qualify for R&D tax relief?
Two types of SMEs qualify for the relief: small SMEs and large SMEs.
Research and development tax credits for small SMEs
A company is regarded as qualifying small SME if it has fewer than 250 employees and/or:
- an annual turnover not exceeding EUR 50m;
- a period-end balance sheet total not exceeding EUR 43m; and
- less than 25% of the company’s capital or voting rights are owned by one or more companies that are not small or medium-sized (unless these companies are certain types of investment company); and
- the accounts must not be qualified.
Research and development tax credits for large SMEs
A company will be regarded as a large SME and able to obtain large companies relief if:
- if the accounts have not been qualified;
- it has fewer than 500 employees and/or:
- an annual turnover not exceeding EUR 100m; and
- a period-end balance sheet total not exceeding EUR 86m.
What expenditure qualifies as research and development?
There is no distinction between large and small SMEs for the purposes of determining what expenditure qualified as R&D for tax relief. The expenditure that qualifies for R&D tax relief must:
- Be revenue expenditure attributable to R&D,
- Must relate to the trade of the business,
- Must be done by the SME or on its behalf – this means that work by consultants and third parties may qualify for small SME R&D relief (expenditure by large SMEs on subcontracted R&D will not be eligible for relief unless the work is subcontracted to selected groups).
Capital expenditure might be covered by capital allowances. Also, if expenditure is covered by a grant or a subsidy no R&D relief can be claimed.
What kind of R&D expenditure relates to the business?
Again, without distinction for large and small businesses HMRC consider the following types of expenditure can qualify:
- Cost of qualifying staff involved (qualifying staff are those who are directly and actively involved in the R&D including researchers or managers who plan, organise and carry out or support the R&D activity);
- Consumable stores used (consumable stores include supplies directly employed in the R&D activity, essentially materials and equipment, but only where the equipment has a short useful life);
- Certain subcontractor costs; and
- Payments to clinical trials volunteers.
There is no minimum spending requirement, nor a requirement that any part of research has to be carried out in the UK. The company does not need to own the intellectual property produced as a result of research – this means that it can be licensed.
Cap on tax relief available for R&D credit?
Large and small SMEs may only claim R&D relief to the extent the total R&D relief claimed for expenditure on a particular project does not exceed EUR 7.5m. It is a lifetime limit for each project. If your company runs multiple large projects they should be closely reviewed to see whether they qualify as separate projects, each subject to the overall cap, to minimise the risk of the expenditure reaching the cap.
Effect of the R&D relief applicable to small SMEs?
The relief reduces profit or increases loss and therefore it decreases corporation tax liability. If the SME is loss making the SME can receive a tax repayment from the government or utilise the losses by carrying them forwards or backwards, using against other income of the period or surrendering as group relief.
Effect of the R&D relief applicable to large SMEs?
The R&D relief for large SMEs allows the company to deduct 30% of qualifying expenditure on R&D on top of the 100% deduction given under the normal rules when calculating profits for tax purposes. This reduces the tax payable by the company or, if it is loss-making, increases the loss available to the SME. Sadly, large companies cannot surrender a loss to HMRC for repayment.
We work with all types of businesses involved in research and development across a range of sectors. We are happy to point you in the right direction not only in terms of compliance with the R&D tax legislation but also in preserving the results of your research via all of the avenues available for IP protection.
I advise on R&D taxation, employee shareholder shares, EMI options, contentious & non-contentious tax as well as corporate matters. Do call me now for an informal chat....