A practical guide to claiming R&D
tax relief
How the relief works
• R&D tax credits – company tax relief which gives
an increased deduction for certain qualifying
expenditure.
• The increased deduction reduces the taxable
profits and hence the amount of corporation tax
payable
• Loss making small or medium companies can in
certain circumstances surrender the losses
arising as a result of the increased deduction in
return for a payable credit.
What is R&D for tax purposes
• The DTI guidelines explain what is meant by
R&D for a variety of tax purposes.
• R&D takes place when a project seeks to
achieve an advance in science or technology.
• Activities which directly contribute to achieving
the advance through the resolution of scientific or
technological uncertainty are R&D.
• A scientific or technological uncertainty exists
when knowledge of whether something is
scientifically possible or technologically feasible,
or how to achieve it in practice, is not readily
available or deducible by a competent
professional working in the field.
• Uncertainties that can be readily resolved by a
competent professional working in the field are
not scientific or technological uncertainties.
Qualifying R&D expenditure
• Must not be capital expenditure
• It must be expenditure attributable to relevant
R&D directly undertaken by the company or on
its behalf
• It is expenditure on:
– Staffing costs
– Software or consumable items
– Externally provided workers
– Subcontracted R&D
Some other conditions
• The amount of payable credit claimable is limited
to the amount of the total PAYE and NIC
liabilities.
• The claim for the payable credit must be made in
the company tax return or amended return.
• Minimum spend = £10,000
• The R&D expenditure must not be subsidised
• Record keeping.
Making a claim
• Identify the R&D project and the activities
included within it.
• Identify the expenditure incurred directly in
carrying out those activities.
• Check whether the company is small/medium
• Calculate the relief due
• Enter R&D amount on CTSA Return (long
version – CT600 version 2)
Help in making a claim
• Help in putting a claim together can be found on
the HMRC website at
http://www.hmrc.gov.uk/randd/index.htm
• Your R&D unit will also be able to provide advice
on what can be included in a claim
A quick R&D example
R&D Example – Ecowash Ltd
• Ecowash Ltd is a small company and after
reviewing the published guidance, it has come to
the conclusion that it’s activities leading to the
development of a new biodegradable cleaning
product are R&D in line with the DTI guidelines.
• The expenditure relating to those activities was
revenue expenditure and has been deducted in
the accounts to arrive at an accounting profit of
£80,000. After various tax adjustments its profit
for tax purposes is £85,000.
• The company has identified its R&D expenditure
as follows;
A). Staff costs - £300,000
• An analysis has been provided and these
include:
• £180,000 on technical staff (who worked directly
on solving the scientific and technological
uncertainties posed by the project)
• £30,000 on sales staff (who canvassed
customers as to the fragrance and packaging of
the new product)
• £50,000 on office and support staff
• £40,000 on scientific staff employed via a staff
agency
Staff costs Allowable
• Only the costs of those staff directly and actively
engaged in the R&D are qualifying expenditure
and so the costs relating to the sales and support
staff will not qualify for relief.
• The qualifying staff costs are therefore £220,000
• Comprising
• Technical Staff
£180,000
• Scientific Staff
£40,000
Software & Consumables
• B). Software and Consumable items - £78,000
• Including fuel and energy costs directly incurred
in the R&D and the cost of chemicals,
ingredients, and lab equipment.
• Software and Consumable items Allowable
• As these directly related to the R&D activity they
are all eligible for relief
• The qualifying software and consumable items
costs are therefore £78,000
C). Subcontracted R&D costs - £175,000
• The analysis provided shows that the company
subcontracted specialist development activities to
another unconnected company at a cost of
£175,000.
• Subcontracted costs Allowable
• Ecowash Ltd can claim 65% of the costs relating
to the R&D work it subcontracted to another
unconnected company.
• The qualifying subcontracted costs are therefore
£175,000 x 65% = £113,750.
Enhancement
• The enhancement due is therefore
• A). Staff costs
• B). Software & Consumables
• C). Subcontracted costs
–
• £411,750 x 50%
(£)
220,000
78,000
113,750
411,750
= £205,875
Adjustment for Corporation Tax
•
•
Adjusted Profits
£ 85,000
Less R&D enhancement
£205,875
•
•
Losses arising
£120,875
•
The loss arising is £120,875 x 16% = a payable credit
of £19,340 There is no loss remaining to carry forward.
The company decides to surrender the losses arising in
return for a payable credit. The payable credit is at a rate
of 16% of the surrenderable losses.