What tax reliefs are available to encourage R&D spending by UK companies?
There are tax reliefs available on qualifying REVENUE EXPENDITURE depending on whether a company is a SMALL OR MEDIUM SIZED ENTERPRISE (SME) or a LARGE company.
R&D Scheme for Small and Medium Sized Enterprises (SMEs)
- SMEs can deduct an ADDITIONAL 130% of QUALIFYING REVENUE EXPENDITURE for tax purposes.
- If the deduction creates a loss it may be surrendered to HMRC in return for a 14.5% cash payment of the surrendered amount. This surrendered amount is then NOT eligible to carry forward for future relief.
QUALIFYING REVENUE EXPENDITURE
- Must be REVENUE EXPENDITURE that seeks an ADVANCE IN SCIENCE OR TECHNOLOGY that is relevant to the COMPANY’S TRADE.
It CAN include spending on the following:
- STAFF COSTS directly involved in the R&D work, including NICs (1 and 1a), pension contributions but EXCLUDING ASSESSABLE BENEFITS.
- AGNECY STAFF for R&D
- MATERIALS, WATER, FUEL & POWER
- SOFTWARE directly used for R&D
- ONLY 65% OF PAYMENTS TO SUBCONTRACTORS is available for the additional 130% cost deduction.
It CANNOT include:
- RENT
- CONTRIBUTIONS to other bodies for R&D
- Expenditure covered by a GRANT
R&D Scheme for Large Companies
Large companies (as defined by R&D relief rules) allows a company to claim an ABOVE THE LINE TAX CREDIT.
The ABOVE THE LINE TAX CREDIT works as follows:
- 13% of the QUALIFYING REVENUE EXPENDITURE is ADDED TO TTP and TAXED AT 19%.
- AND
- 13% of the QUALIFYING REVENUE EXPENDITURE is also a TAX REDUCER to the CORPORATION TAX LIABILITY.
For example, if £100,000 is QUALIFYING REVENUE EXPENDITURE then (13% x £100,000) £13,000 is ADDED to TTP. £13,000 is also deducted from the CORPORATION TAX LIABILITY as a TAX REDUCER.
Capital Expenditure on R&D
Capital expenditure on R&D (EXCEPT LAND) qualifies for 100% R&D Capital Allowance in the year of purchase. This expenditure is FULLY DEDUCTIBLE irrespective of whether SME or LARGE.
Capital expenditure DOES NOT qualify for any ADDITIONAL R&D RELIEF.
When the capital asset is sold, the proceeds are treated as a balancing charge (since they have been fully written down) which is then taxed as trading income.