Tax relief if you create

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Over the years, tax savings have been introduced to help businesses involved with technology, creative works and intellectual property. At the same time HMRC expand and tighten up the qualifying conditions for the tax savings so you need to stay up to-date. Tax rules do not stand still.

One of the most attractive tax concessions is that applying to expenditure by a company on research and development or expenditure on creative works.

We look at:

Developing technology – research and development tax credits

Tax reliefs for qualifying research and development expenditure are generous. What’s more, your business does not even need to be profitable to benefit from R&D tax credits. The definition of research and development is broad. R&D can include for example, activities aimed at new knowledge, the search for new findings, the formulation of designs, the testing of new or improved materials and devices, and the construction of products economically feasible for commercial production.

Our knowledge of the R&D tax credit system enables us to provide more focused commercial advice when dealing with your legal agreements.

How to claim R&D Relief

There are two schemes available for claiming the R&D relief; which one you use depends on the size of your business. There is the SME Scheme and the less generous Large Company Scheme.

SME Scheme for claiming R&D relief

For R&D relief tax credit purposes a SME is a business which:

  • Has less than 500 employees; and
  • An annual turnover of not more than €100 million or gross assets of more than €86 million.

The tax relief on qualifying R&D expenditure under the SME scheme is now 230%.

Loss making companies under the SME scheme

Where an SME makes a loss for corporation tax purposes, the total amount of the loss arising after the R&D claim can be carried back to the previous accounting period (assuming there is a taxable profit), can be carried forward to be offset against future profits (as and when they arise) and/or be surrendered to HMRC in return for an R&D cash payment to bolster cash flow.

You can only claim R&D Relief as a SME company if your company is a going concern when it made the claim i.e. it wasn’t in administration or liquidation. If your company ceases to be a going concern between making the claim and receiving the credit then HMRC will not pay the credit.

Larger than an SME

There is a regime known as Research and Development Expenditure Credit (“RDEC”) available for businesses too large to qualify as an SME.

Some SMEs are treated as a ‘large company’ for the purposes of the R&D tax credit calculation because they are a  ‘linked’ or ‘partnered’ enterprise (for example; where 25% or more of the share capital or voting rights of the SME are held by another entity). When considering the SME definition a company must look at the aggregated amount for each of the qualifying criteria (i.e. employees, turnover and gross assets) on either an absolute basis (for linked enterprises) or on a proportioned basis (for partner enterprises).  We do guide you through the rules and work with your accountants.

What is qualifying R&D expenditure?

Where the business and the project meet the necessary requirement to claim  R&D relief qualifying expenditure gives rise to a tax saving.  Qualifying expenditure can include:

  • Software used by the R&D staff;
  • Energy and materials consumed;
  • Salaries;
  • Subcontracted R&D costs;
  • Research and development undertaken by a contractor for an end user.

R&D relief is taken as an additional deduction for Corporation Tax purposes by reducing your profit or increasing your loss which is carried forward for offset against future profits.

HMRC advance assurance for R&D expenditure

HMRC will review actual or planned R&D expenditure for small companies and let them know if the expenditure incurred or about to be incurred will qualify for R&D tax relief.

Assurance available to small companies only

HMRC offer the service only to “small companies” and define small as:

  • Companies claiming R&D expenditure for the first time; and
  • Whose turnover is under £2m and who have fewer than 50 employees.  The measure is at the point of application for HMRC advance assurance and approval is not withdrawn if turnover or employees subsequently increase beyond the limits.

Benefits of seeking advance assurance from HMRC

Successful companies will receive an assurance that HMRC will allow their first three years of R&D expenditure to be claimed without further enquiry.   If the application for advance assurance is turned down, the business can still make a claim in the usual way via its corporation tax return.

Developing creative works

Creative and media industries can claim cultural reliefs to reduce their corporation tax bill.  The system of relief is similar to, but not exactly the same as, the system of R&D tax credit relief. Broadly, the creative industry reliefs apply to the following industries:

  • Film and animation;
  • High-end TV and children’s programmes;
  • Video games;
  • Theatre; and
  • Orchestra.

Qualifying expenditure

Creative industry tax reliefs are available for:

  • Film production companies producing films
  • Television production companies producing relevant animation or high-end television programmes
  • Video game development companies
  • Theatre production companies
  • Orchestra production companies

Benefit of a claim to creative industry tax relief

Qualifying companies can claim either:

  • an additional tax deduction (the enhancement) of up to 100% of enhanceable expenditure or,
  • if a loss is surrendered: 25% of the loss up to the amount of enhanceable expenditure.

The rules are complex and some activities are excluded, such as promotional campaigns or advertisements. We can guide you on how to maximise your chances of claiming the relief.