R&D Expenditure by Companies

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.