Research & Development Tax Relief

Tax relief for expenditure on R&D is provided for in Part 13 of Corporation Tax Act 2009 and offers a system of enhanced tax deductions/credits for qualifying expenditure.

Research and development (R&D) is defined as activities falling to be treated as such in accordance with generally accepted accounting practice (GAAP), but the Treasury has powers to modify the definition by specific regulations.

The relevant standards for this are SSAP 13 under UK GAAP and IAS 38 under International GAAP.

For the purpose of the tax reliefs available, R&D has the meaning given by section 1138 of the Corporation Tax Act 2010.

This means activities which fall to be so treated in accordance with GAAP, but not including oil and gas exploration and appraisal.  

The BIS website provides guidelines on the meaning of research and development for tax purposes.

The current definition is:

'R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.

The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.

Certain qualifying indirect activities related to the project are also R&D.

Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.'

There is a requirement that the R&D carried on by the company is either related to a trade carried on by the company or from which it is intended that such a trade will be derived.

R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade and medical research that has a special relation to the welfare of workers employed in that trade.

There are two schemes for claiming relief, depending of the size of the company:

• Small or Medium-sized Enterprise (SME) Scheme
• Large Company Scheme

Although Commission Recommendation 2003/361/EC sets limits defining a micro, small or medium-sized enterprise, these limits are extended for the purposes of R&D relief in relation to expenditure incurred on or after 1 August 2008 by limits set by Treasury regulations.

For the purposes of R&D relief from 1 August 2008, an SME is a company meeting the EU SME definition but with the following wider limits:

An entity’s employee, turnover and balance sheet figures must be aggregated with figures for certain ‘linked enterprises’ and ‘partner enterprises’.

An SME is entitled to R&D tax relief for an accounting period in which it has total qualifying R&D expenditure of not less than £10,000.

Some conditions are specific to the SME scheme. These are:

• The company must not be in receipt of a notified state aid in respect of the project
• Expenditure must not be subsidised
• The company must not have been contracted to carry out the R&D
• The company must be a going concern (see below)
• The R&D project must not receive total aid of more than €7.5m

Method of relief

• Small and medium-sized companies as defined can claim R&D tax relief for 225% of their qualifying revenue expenditure on R&D, provided that it amounts to not less than £10,000, or pro rata amount for an account of less than 12 months. The relief would normally be claimed by deducting from taxable profits in the company’s corporation tax computation, an amount equal to 100% of the R&D expenditure.
• Expenditure on R&D work subcontracted to them by large companies is included in deciding whether the £10,000 threshold has been reached.
• Relief at 225% of the expenditure gives companies liable to pay the small profits rate of 20% a tax saving equal to 45% of the R&D expenditure.
• Companies carrying on R&D before they start to trade may treat the R&D relief as a trading loss.
• Where a company has a surrenderable trading loss, it may surrender the R&D tax relief (or the unrelieved loss if lower) in exchange for a tax credit equal to 12.5% of the surrendered amount (equal to 25% of the qualifying expenditure).  The credit cannot, however, exceed the company's PAYE tax and NIC liabilities for payment periods ending in the relevant accounting period. The tax credit will be paid to the company, or used to discharge outstanding corporation tax liabilities.
• Where a large company subcontracts work to a small or medium-sized company, the small/medium-sized company may claim R&D relief of 130% of the qualifying expenditure.

A large company is a company that is not an SME.

A large company is entitled to R&D tax relief under Part 13 Chapter 5 of Corporation Tax Act 2009 for an accounting period if it meets conditions (a) and (b) below:

(a) The company is a large company throughout the period.

(b) The company carries on a trade in the period.

Method of relief

Large companies (ie those not within the definition of small and medium-sized companies above) may claim R&D relief of 130% of their qualifying revenue expenditure on R&D.

• Relief at 130% of the expenditure gives companies liable to pay the tax at the main corporation tax rate of 26% a tax saving equal to 33.8% of the R&D expenditure.
• Qualifying expenditure includes direct R&D expenditure, expenditure subcontracted by the company to an individual, partnership, university, charity or other qualifying body, and contributions to individuals, partnerships and qualifying bodies for independent R&D which is relevant to the company.
• There is no provision for large companies to surrender R&D relief for a tax credit payment.
• Where a large company subcontracts work to a small or medium-sized company, the small/medium-sized company may claim R&D relief of 130% of the qualifying expenditure.

If the company and the project meet the necessary conditions, then tax relief can be claimed on the following items of revenue expenditure:

• Staff costs: this means the cost of employing staff directly who are actively engaged in carrying out R&D itself.
• Externally provided workers and sub-contractors: this covers the cost of paying a staff provider for staff provided to the company, or a sub-contractor, who are directly and actively engaged in carrying out R&D.
• Consumable items: these include consumable or transformable materials used directly in carrying out R&D.
• Software: revenue expenditure incurred on computer software employed directly in R&D.
• Utility costs: power, water, fuel used directly in carrying out R&D, but not, for instance, telecommunication costs and data costs.
• Payments to clinical trials volunteers.