Research & Development (“R&D”) Tax Credits are a Corporation Tax incentive that can significantly reduce a company’s corporation tax bill, or in some circumstances provide a tax refund to the company.
What is R&D Tax Relief?
R&D tax credits are designed to reward companies for investing in innovation by significantly reducing their tax burden and freeing up cashflow to support growth and accelerate R&D activity.
R&D is widely accepted to be one of the most generous tax incentives available to qualifying companies and, despite being introduced in 2000, evidence indicates the relief is under-utilised by SMEs in Northern Ireland.
A project that qualifies for R&D Tax Credits will seek to achieve an advance in overall knowledge or capability in a field of science or technology. The project is often an activity that companies undertake to develop new products, processes, services, or improve those that already exist.
R&D in SME companies does not tend to fit the stereotype of ‘people in white coats in laboratories’. In reality SMEs often have an element of innovation embedded within their businesses that allows them to remain competitive in the market. In many cases the challenge, when it comes to R&D, is not the absence of a qualifying project, but being able to capture the parameters and the costs associated with it.
How does it work?
Companies that are carrying out qualifying R&D can claim extra tax deduction on related expenditure in their corporation tax computation. There are two schemes, the SME scheme and the RDEC scheme, and as set out below the level of relief depends upon which scheme applies. Typically the SME scheme will apply, except where the company has either received Notifiable State Aid (including some Grants) or is classified as large.
The SME Scheme
SME R&D relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Research & Development Expenditure Credit (RDEC)
The RDEC is a tax credit which from 1 April 2020, is 13% of a company’s qualifying R&D expenditure.
What does and does not qualify for R&D Tax Relief?
Costs which qualify for R&D Tax Relief include: –
- Direct staff costs
- Externally provided staff (65% of staff costs paid to an unconnected external agency);
- Subcontracted costs (generally, 65% of payments to unconnected parties (different rules apply in respect of the RDEC scheme);
- Consumables and materials directly employed and consumed in the R&D process (materials incorporated in final saleable products do not qualify);
- Utilities consumed in the R&D process; and
- Software that is directly employed in R&D activities.
Some costs including the production and distribution of goods and services and the payments for the use and creation of patents and trademarks, are specifically excluded.
Business owners and SME boards should consider the level of innovation in their business as a matter of good practice and planning. Where projects are undertaken to advance the overall knowledge or capability within the business, and where there is not a readily available solution to solve the problem, then the availability of R&D tax credits should be considered. Specialist R&D advice will confirm that the project meets the criteria and will help unlock the full value of the relief to which the company is entitled.
The above article is for general guidance and informational purposes only and is not intended to constitute legal or professional advice. It should not be taken as specific advice for your own circumstances and relied upon. You are advised to take professional advice before taking any action in relation to the above matters.
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