About R&D tax credits
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The Chancellor made a commitment in the 2011 Autumn Statement to introduce an “Above the Line” (ATL) credit in 2013 to encourage research and development (R&D) by larger companies – i.e. companies not eligible for the SME R&D tax credit scheme.
Your views are now sought [27 March 2012 to 29 June 2012] on the detailed design of the ATL credit - see the consultation document at http://www.hm-treasury.gov.uk/d/consult_abovetheline_credit_260312.pdf.
The Government is particularly interested in the assessment of accountants as to whether the proposals in this consultation can be genuinely accounted for ‘above the line’.
Under the ATL scheme the R&D tax credit will be accounted for as a reduction in the R&D spending of the company – not just reflected in the tax line of the accounts, increasing the visibility and certainty of the R&D Tax Credit and making it more attractive to multinational investors.
In Budget 2012 the Chancellor announced that the minimum rate of the ATL scheme will be 9.1% and that loss making companies will be able to claim a payable tax credit.
The Government is not proposing to change the existing SME R&D tax credit to an ATL credit and the level of support under the small business scheme will not be reduced as a result of these changes.
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Following consultation on the effectiveness of the R&D tax credit schemes, the Government announced in Budget 2011
- an increase in the rate of R&D tax credit under the SME scheme (companies with under 500 employees) from 1 April 2011 to 200 per cent and from 1 April 2012 to 225 per cent (These increase have now received EU State aid approval).
- simplification of the R&D tax credit scheme.
Further budget announcements are detailed at Can my company benefit from R&D tax credits.
The Government also announced other changes, to be introduced in the Finance Bill 2012:
- removal of the Pay As You Earn (PAYE)/NICs cap on the amount of payable credit that can be claimed under the SME scheme
- removing the minimum expenditure rules (i.e. £10,000 of qualifying R&D during the company’s accounting year)
- allowing relief through the large company scheme for subcontracted activity which forms part of a wider R&D project
- changes to Vaccines Relief
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Companies can sustain or improve profits and grow by creating new high value-added products, processes and services. Continued investment in technologically based research and development (R&D) can underpin these improvements.
R&D tax credits are primarily a tax relief. They are the biggest incentive provided by Government for investment in business R&D and businesses should check that they are taking full advantage of this scheme.
Budget 2011 announced that the rate of relief under the SME scheme (companies with fewer than 500 employees) would increase from April 2011 from 175% of qualifying R&D expenditure to 200% and from April 2012 to 225%. These rates increases have since received EU State aid approval. Alternatively, companies not in profit claiming under the SME scheme may be entitled to a cash payment worth 25 per cent of qualifying expenditure from April 2011, and 24.75 per cent of qualifying expenditure from April 2012 – an increase on the previous rate of 24.5 per cent cash payment for every pound of expenditure on qualifying R&D. The rate of relief under the large company scheme remains at 130% of qualifying R&D expenditure.
The latest R&D tax credit data (FY09/10, published October 2011) shows that over 9,400 claims were made during the year to 31 March 2010, for support totalling £1.02 billion based on £10.14 billion of R&D expenditure. For further details, by year since the beginning of the scheme, see the HMRC corporate tax site.
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A CBI survey (published February 2009) highlights the positive impact of the R&D tax credit on business R&D investment in the UK. The survey found that the value of the credit to companies now exceeds the ‘noise-level for investment decisions’.
Key findings include:
- savings on R&D costs delivered by the tax credit now average eight per cent (with SMEs on average saving 10.5 per cent, medium-large companies 8.5 per cent and large companies 6.0 per cent)
- 37 per cent of companies surveyed increased R&D as a result of the credit
- three quarters of companies surveyed said the credit had helped directly or indirectly to maintain their R&D investment in the UK.
The CBI survey also found that the role of HMRC in handling claims and providing advice had improved significantly; also, that the credit is now an important factor for companies when deciding where to base R&D activity, improving the attractiveness of the UK as a destination for high value investment and jobs.
Referring to the survey in their response to the 2nd HM Treasury Consultation on R&D tax credits (June 2011), CBI note that move to a corporation tax rate of 26% reduces the absolute value of the R&D tax credits under the Large Company scheme from 8.4% of R&D costs to 7.8% (i.e. 30% super deduction x 26% CT rate = 7.8%) – see http://www.cbi.org.uk/media/936619/2011.09.05-rd-tax-credit-2nd-consultation-cbi-response.pdf.
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The credit is made available either as a tax deduction based on R&D spending or it may be possible for certain loss making small or medium sized companies (SMEs) to surrender their losses in return for a cash payment from HMRC.
The relief was developed through consultation with business and is available to companies throughout the UK and across industry sectors. To be able to claim relief a company must be undertaking qualifying R&D (defined in the Guidelines sign-posted below). Qualifying R&D includes 'brown collar' R&D as well as the more obvious 'white collar' R&D.
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All companies spending at least £10,000 in their accounting year on qualifying R&D are entitled to claim a deduction when calculating their taxable profits of:
- 175% of qualifying expenditure for SMEs in respect of expenditure incurred on or after 1 August 2008 rising to 200% from April 2011 and 225% from April 2012 or
- 130% of qualifying expenditure for larger companies until 31 March 2008
reducing the company's UK corporation tax bill accordingly.
Alternatively, companies not in profit claiming under the SME scheme may be entitled to a cash payment worth 25 per cent of qualifying expenditure from April 2011, and 24.75 per cent of qualifying expenditure from April 2012 – an increase on the previous rate of 24.5 per cent cash payment for every pound of expenditure on qualifying R&D.
In Budget 2011, in addition to announcing changes in the rate of relief under the SME scheme, the Chancellor also announced the removal of the PAYE/NIC cap on the amount of payable credit that can be claimed, and the removal of the minimum (£10,000) expenditure rule before the credit can be claimed. These changes will be introduced in the Finance Bill 2012.
The Chancellor also announced that the Government will consult on options to allow relief through the large company scheme for sub-contracted activity which forms part of a wider R&D project.
The 2009 Pre-Budget Report (PBR) announced that from 9 December 2009 a SME would no longer have to own any 'intellectual property' (IP) attributable to its R&D expenditure as a condition of being able to claim. The change applied to any expenditure incurred in accounting periods ending on or after this date.
With effect from 1 August 2008 changes introduced to the SME R&D scheme and the Vaccine Research Relief (VRR) schemes were:
- companies whose most recent accounts are not produced on a going concern basis were unable to claim relief
- a cap will be introduced to restrict the amount of relief under these schemes to €7.5 million per R&D project
- large companies will have to make a declaration concerning the incentive effect of relief they are claiming under the VRR scheme
- the special subcontracting rules for charities, universities and scientific research organisations under the VRR scheme were removed; subcontracting to any of these bodies was put on the same basis as any other subcontracting arrangement
- companies were no longer be able to claim relief under the VRR scheme in respect of contributions they make to independent research carried out by charities, universities and scientific research organisations
For further information about these changes, see http://www.hmrc.gov.uk/research/vrr-tax-relief-rules.htm.
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Companies can claim R&D tax credits for their revenue expenditure on:
- employing staff directly and actively engaged in carrying out R&D
- paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D
- consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D)
- power, water, fuel and computer software used directly in carrying out R&D
Capital expenditure is not eligible - this may be covered by 100% capital allowances (Research & Development Allowances) instead.
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The guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry in 2004 set out the full definition of R&D for tax purposes.
A basic definition is "work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology". Advances include new or improved products, processes and services.
Broader innovation in products, processes and services (e.g. proprietary content, non-technical design or developing other non-technological unique selling points) isn't R&D.
If it's obvious to a professional how to do something, doing it isn't R&D. If there is a 'non-obvious' scientific or technological problem around how to do something, then doing it is probably R&D.
As a rule of thumb, developing information or other 'content' is not R&D, but developing the means to deliver 'content' can be R&D.
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SME R&D tax credits scheme
- from 1 August 2008 the rate of relief increased from 150 per cent of qualifying expenditure to 175 per cent of qualifying expenditure and, from 1 April 2011 increased to 200%. The rate will increase again from 1 April 2012, to 225%;
- from 1 August 2008 the scheme was extended to companies with more than 250 but less than 500 employees.
Large company scheme
- from 1 April 2008 the rate of relief increased from 125 per cent of qualifying expenditure to 130 per cent of qualifying expenditure.
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Claims time limit
The time limit for making R&D claims was reduced for accounting period ending on or after 31 March 2006 from six to two years after the end of relevant accounting period.
Processing of claims
Companies claim the credit when submitting their corporation tax return (CT600). Most claims are processed by HMRC R&D specialist units. The units were introduced to help ensure greater consistency in dealing with claims and more certainty for companies making claims. To find the R&D specialist unit that would deal with your claim see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD80360.htm. To find contact details for the unit see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD80350.htm.
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To claim under the SME scheme for work undertaken before 1 August 2008 you must have fewer than 250 employees with either an annual turnover not exceeding €50m or a balance sheet totalling €43m, and not be part of a larger Enterprise that would fail these tests.
For work undertaken on/after 1 August 2008 the SME scheme is being extended to companies with fewer than 500 employees which have an annual turnover not exceeding €100m and/or with an annual balance sheet total not exceeding €86m
Other companies should apply for the large company scheme.
See also ‘Differences between the SME and large company schemes' to find out more.
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The Technology Strategy Board (TSB) runs grant-based collaborative R&D programmes, via competitions, on behalf of BIS. It is important that companies know that they can claim R&D tax credits for their own qualifying R&D costs incurred on these projects. This is provided that the company has incurred a minimum of £10k qualifying R&D costs on the total of the company’s R&D during the company’s accounting year.
Companies can also claim for qualifying R&D costs funded by the grant, because there is no provision under the Large company R&D tax credits scheme preventing subsidised expenditure from qualifying for R&D tax relief.
Claims from both SMEs and Large companies have to be made under the Large company scheme. This is because the type of grant delivered by the TSB is classified as a notified State aid. This means that the grant scheme has to be notified to and approved by the European Commission under the State aid rules. To prevent cumulation between different reliefs, the State aid rules prevent companies in receipt of any other State aid from claiming the SME R&D relief. The large company scheme is not a State aid and does not have this condition.
A worked example for a SME company receiving a grant via TSB is given below. In this case the company is making a profit and can claim tax deductions totalling £325k on qualifying expenditure of £250k. For further advice please speak to your local HMRC specialist unit.
What SMEs can claim in receipt of a TSB-managed grant
| Qualifying R&D expenditure |
R&D tax credits |
| Funds |
Scheme |
Rate of relief |
Relief £k |
| Source |
£k |
Grant (State aid) Company's own resources |
100.0 150.0 |
Large company Large company |
130% 130% |
130.0 195.0 |
| Total |
250.0 |
|
|
325.0 |
Checking whether a grant is notified State aid
As noted in the above section on Technology Strategy Board, the State aid cumulation rules mean that in principal companies cannot normally receive two notified State aids for a project. This is explained further in the HMRC manual. Check the EU state aid register to see whether a grant is a notified State aid.
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The Framework Programme for Research & Technological Development (FP), is the EU's main instrument for funding research in Europe. R&D tax relief can be claimed for work in projects funded by this Programme. Unlike the TSB-administered grants, the FP is NOT notified State aid. So SMEs in receipt of FP funding can claim relief under the SME R&D tax credits scheme, including the payable tax credit if appropriate, for their own expenditure on the project. Relief on the FP7 grant can be claimed under the Large Company scheme.
A claim cannot be made under the SME scheme If another form of notified state aid is being received for the project In which case a claim can in most circumstances be made under the Large company scheme.
In the tabular example below the SME can claim tax deductions totalling £392,500 against qualifying R&D expenditure of £250,000.
Example of what R&D tax credit a SME can claim in a FP-funded project:
| Qualifying R&D expenditure |
R&D tax credits |
| Funds |
Scheme |
Tate of relief |
Relief £k |
| Source |
£k |
FP7 Grant Company's own resources |
100.0 150.0 |
Large company SME |
130% 200% |
130.0 300.0 |
| Total |
250.0 |
|
|
430.0 |
Note: the rate of relief under the SME scheme increases to 225% from 1 April 2012.
Large companies can claim under the large company scheme for all qualifying R&D expenditure projects including for the FP grant-funded element.
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Companies may miss out on this incentive because they do not appreciate that they are performing R&D for which they can claim - or that the claiming process is straightforward. For a brief overview of what’s involved in claiming see our leaflet "R&D tax credits: What's in it for you?" and also our case studies.
The case studies give practical examples from different industrial sectors of the wide range of companies that have claimed and include advice about preparing the first claim. BCC, CBI, Design Council, EEF and Business Link have endorsed both the leaflet and case studies. See:
R&D tax credits: What's in it for you? (PDF, 233 Kb)
Applying for R&D tax credits: Case Studies of Companies' Experiences
PLEASE NOTE. The leaflet and case studies were prepared several years ago and that although the principles illustrated still apply, the rates of relief quoted have been raised. It is proposed to prepare a refresh of these studies.
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See the comprehensive information provided by Business Link.
It can be a good idea to discuss a possible claim - particularly a first claim - in advance with your tax inspector. This can save wasted effort for you and for them!
Professional advisers such as your accountant can also help you make a claim, for a fee.
Trade associations and professional networks may help put you in touch with other companies with experience of claiming R&D tax credits.
Contact BIS
Innovation Investment Policy
Department for Business, Innovation and Skills
Orchard 2, floor 2
1 Victoria Street
London
SW1H 0ET
Email: Andrew.Culley@bis.gsi.gov.uk
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