Research & development claims from small companies
If you are a small or medium sized company who has invested in significant research and development activity it could be worth finding out if you qualify for R&D tax relief from HMRC under the Small and Medium-sized Enterprise Scheme. This will effectively act as a contribution to the expenditure you have incurred. If you are considering making a claim the first step is to ensure that your company meets HMRC’s definition of an SME for R&D tax relief purposes.
HMRC’s definition of SME sized companies for R&D tax relief purposes
This definition is specific to R&D tax relief and is – confusingly – not necessarily the same definition as given for other tax areas such as PAYE.
To qualify, for R&D activity carried out from 1 August 2008, your company must have:
- fewer than 500 employees
- an annual turnover not exceeding €100 million
- a balance sheet not exceeding €86 million
If your company is part of a larger enterprise or group it may not be considered an SME and may therefore not pass the above tests.
Your company must be a going concern at the time of the claim. Companies which are in liquidation or have ceased trading do not qualify for this Scheme.
If you are a subcontractor you won’t be able to claim under the SME scheme, but in certain circumstances you may be able to claim under the Large Company Scheme.
The Small and Medium-sized Enterprise Scheme
This scheme offers higher rates of relief than for larger companies, presumably to encourage growth.
What kinds of R&D projects could qualify for relief under this Scheme?
There are two key criteria which determine if an R&D project qualifies for relief:
- It is not enough that the R&D advances your own company’s knowledge boundaries or capabilities to bring in more business. It must be of a calibre which advances ‘overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’.
- If the R&D has taken place after 9 December 2009 it must be related to what your company does as a trade. This can be an existing trade or one you intend to start based on the R&D you have undertaken.
HMRC has very specific requirements for companies to demonstrate they qualify on the above points. These should be carefully considered before making a claim.
What R&D costs qualify for R&D relief?
To qualify for relief the activities and items which have been paid for must contribute directly to the advance of science or technology, or be a qualifying indirect activity, as defined by the Dept for Business, Innovation and Skills. The cost areas that HMRC specifically mentions as allowable are:
- Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself.
- Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D.
- Materials – consumable or transformable materials used directly in carrying out R&D.
- Payments to clinical trials volunteers – relevant payments to subjects of clinical trials.
- Utilities – power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
- Software – computer software used directly in the R&D.
- Subcontracted R&D expenditure – you may be able to claim back 65% of what you spend on certain R&D activities carried out for you by a subcontractor. If the subcontractor is connected to your company or organisation special rules apply.
- Capital expenditure – R&D Relief is only available for ‘revenue expenditure’ (day-to-day running costs, as opposed to capital expenditure). However, if you are involved in R&D and you spend money on capital assets you may be able to claim R&D capital allowances.
If you would like to discuss your company’s R&D expenditure or find out if you may be eligible for R&D tax relief, speak to your personal Intouch accountant.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.