Research & Development Tax Relief
What is Research & Development (R&D)?
Broadly, R&D is defined for these purposes as activities carried out that “seek an advance in science or technology, through the resolution of scientific or technological uncertainty”.
The advance may be in the development of a product, or a process, and may include software developed internally.
It is a common misconception that only companies operating in certain sectors are eligible for this relief. We have worked with companies in all sectors which vary in size and structure to successfully claim the relief, including life sciences, manufacturing, marine, aerospace and defence, software; even the recruitment industry.
What is the benefit?
There are two regimes for R&D relief: SME scheme and the large company scheme.
Small and Medium-sized Enterprise scheme (SME)
Under the SME scheme, the benefit is delivered as an enhanced deduction that reduces taxable profits/increases trading losses or, alternatively, a cash tax ‘credit’ can be claimed.
Qualifying expenditure incurred on or after 1 April 2012 will qualify for enhanced R&D tax relief at 225% (i.e. 125% beyond the original P&L deduction). Qualifying expenditure incurred on or after 1 April 2015 will qualify for enhanced tax relief 230%.
The value of the tax credit under the SME scheme is:
Companies can claim under the SME scheme provided the company or group has:
- fewer than 500 employees, and either
- turnover of less than €100m or
- gross assets of less than €86m.
Large company scheme
For costs incurred after 1 April 2013, two schemes run in tandem – the legacy scheme and the new R&D expenditure credit (RDEC) scheme.
Under the legacy scheme, qualifying expenditure will benefit from R&D relief at 130% with no availability of a payable credit.
Under the new research and development expenditure credit or RDEC scheme, the benefit is now delivered above the line (ATL) in the body of the profit and loss account (i.e. before EBITDA) and is a taxable credit:
Large company scheme – to ATL or not to ATL?
With the two reliefs running in parallel until April 2016 (when the legacy relief ceases), companies face the decision of when to ‘opt in’ to the ATL regime. For most companies, the decision is simple:
- The RDEC offers a higher rate of relief (7.9% vs 6.3%) based on a corporation tax rate of 21% and 8.8% after 1 April 2015 when corporation tax falls to 20%.
- The RDEC will increase the company’s EBITDA by 10% of qualifying expenditure (11% after 1 April 2015).
- The RDEC offers a payable credit to loss making companies.
There are, of course, other factors to consider before opting for the ATL regime, but the opportunity is clear.
How to make a claim
When preparing and submitting a claim for R&D tax relief the key is to look at what the company does. This will include engaging with other areas of the business, particularly technical staff, to ensure the claim is appropriately scoped out.
The next step is to design a methodology that avoids using significant internal resource to provide details of qualifying costs and activities.
The claim is made within a company’s tax return, but we recommend that this is supported by a self-contained report that explains the nature of the work on which a claim is being made and addresses the questions that HMRC will typically ask.
Our experience of working with HMRC since the relief was introduced in 2000, and through representation on the consultative committees, means that we know what HMRC are expecting to see from a claim so we can minimise the risk of lengthy enquiries into the claim.
Where BDO make the difference
BDO Northern Ireland’s specialists have close relationships with the HMRC local specialist teams. The local R&D Inspectors are trained to actively support claims from companies undertaking R&D and our experience has been that HMRC have become increasingly knowledgeable about the relevant industries. With the focus of the guidance becoming increasingly complex, it is crucial to involve an R&D specialist at an early stage to ensure that the relief is maximised.
BDO Northern Ireland can assist in identifying qualifying R&D expenditure and help maximise the benefit of a claim. Our pragmatic, commercial approach helps capture all the relevant information required without taking up excessive management time.