Comment & Analysis
Nadeem Hussain, head of tax at Pierce, the Blackburn-based business advisory and accountancy group, looks at how significant savings are available to business.
Businesses which carry out research & development (R&D) activities can claim R&D Relief from the Government, and significantly reduce their tax bills.
Statistics published by HMRC show that in excess of 52,000 claims have now been made for research and development tax credits and that the total relief claimed since inception of the scheme is £5.9bn (with £5.6bn paid).
Directors should not believe that in order to be carrying on qualifying R&D activities they need to employ staff who work in white coats and laboratories. Instead, the company needs to be undertaking projects that seek an appreciable improvement in science or technology – the potential qualifying activities are therefore wide ranging.
An important point to emphasise is that qualifying activities may include the duplication of processes and solutions that competitor companies may well have completed. Unless their knowledge was in the public domain any duplication of research and development may well still qualify. In that sense we have moved away from only rewarding “ground breaking” research and development which was the perceived basis of the rules when they were first introduced.
Eager to promote the UK as a centre of excellence, the Chancellor introduced further generous incentives in its recent budget. He increased the R&D enhanced tax allowance – the amount which a business can claim as a tax deduction – from 200 per cent to 225 per cent of qualifying expenditure on R&D activities. This means that under particular circumstances, the tax relief on the company’s qualifying expenditure can be as much as 56.25 per cent.
By way of example, a company which pays corporation tax at marginal rates of 25 per cent and has incurred qualifying R&D expenditure of £100,000 could prospectively decrease their corporation tax liability by a further £31,250.
Company directors should not forget that a company need not have taxable profits to benefit from R&D claims; payable tax credits are available to surrender in return for cash, vital to loss making companies.
In seeking to address the disproportionate benefit of R&D claims to larger company schemes the Chancellor has dispensed with the minimum £10,000 qualifying spend criteria, thereby opening the incentives to all companies engaged in qualifying activities. This is because historically the number of SMEs claiming R&D tax relief has represented in excess of 90 per cent of claims, the amount claimed is only 34 per cent.
The research and development tax claim must be made on the company’s tax return. The normal time limit for making a claim is two years after the end of the relevant corporation tax accounting period.
In making a claim, HMRC will look to ensure that the claiming company has undertaken a project, or projects, that have sought an advance in science or technology and that complies with accepted definitions of R&D.
To mitigate the risk of further enquiry, it is advisable to submit a structured report with a company’s tax return that summarises the R&D activities that have been taken, and how it has arrived at the enhanced qualifying expenditure figure. The report will be dealt with by one of HMRC’s seven R&D tax units based around the country.
It can be difficult to complete a report a significant amount of time after the work has been done. It is therefore advisable for a business to work with its business advisors ahead of completing R&D activities to ensure that systems can be put in place to capture qualifying costs, and to record the work undertaken in sufficient detail to ease the preparation of a report.
The 2012 Budget was aimed squarely at turning the tide of UK technology and manufacturing leaving for overseas shores, so any business which thinks it may be carrying out qualifying work should get in touch with its advisors.