A valuable but sometimes missed relief available to Limited Companies in the UK comes in the form of Research and Development (R&D) Relief. In this article, we are considering the relief available to SME’s.
In this context, an SME is a company with less than 500 staff and turnover below €100m or balance sheet total of less than €86m. In considering these criteria, it is necessary to consider linked companies and partnerships but even so, the ceiling is quite high. Different reliefs are available to larger companies.
So what will qualify for R&D Relief?
The work will need to be part of a project designed to make an advance in science or technology. The company will need to demonstrate how the project:
• Was looking for an advance in the field of science or technology
• Had to overcome uncertainty
• Attempted to overcome uncertainty
• Could not easily be overcome by a professional in the field.
The project may be completely new or merely designed to improve an existing product or service.
Form of relief
If the claimant company can overcome these four hurdles, then the relief available can have a significant impact on its Corporation Tax liability.
Essentially, the company will be able to claim and extra 130% of qualifying costs on top of the actual 100% actually spent e.g. if the company can demonstrate wages costs on an R&D project of £20,000, the profit for the year can be reduced by a further £26,000, thereby reducing the Corporation Tax liability by £4,940 (at the current tax rate of 19%).
Alternatively, if the company is loss making, it can surrender the relief and receive a tax credit of 14.5% in return. In the above example this would equate to a credit of £3,770.
A variety of costs incurred can qualify for R&D Relief including:
• Direct labour costs (salaries, NIC and pension) of staff involved in the project. An element of support/administrative staff costs may be claimed if these can be demonstrated to relate to the project.
• Up to 65% of the cost of agency staff or subcontractors involved in the project.
• Consumables including materials (although not if the product is subsequently sold), water, fuel and power.
• Software directly used in the project.
As mentioned at the beginning of this article, this relief can be very valuable but is often overlooked or deemed too complicated to claim. At Thomas Westcott, we have wide experience in assisting clients to put claims together and submit these to HMRC.
If you think that you may be missing out, please contact your local Thomas Westcott office HERE.
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