UHY Ross Brooke Chartered Accountants

R&D Tax Relief – It's not rocket science

Updated 04/04/2022

Hands up anyone who would like to handover £1 and get £2.30 back? Sounds like a good deal doesn’t it? Well in a way that’s pretty much what the Research and Development Tax relief for small companies offers. The most surprising thing about this scheme is despite the fact that it has been around for many years, how few businesses take advantage of it.

I imagine the reasons for that are twofold. Firstly, simple lack of knowledge and secondly the belief that the scheme only applies to boffins dressed in white coats in a laboratory. This misconception probably stems from the initial marketing campaign which involved pictures of test tubes and since then it has incorrectly been dismissed as of no relevance to many more businesses.

Research and Development relief against corporation tax comes in two forms; one available to SMEs (typically up to 500 employees, and less than $100 million turnover or $86 balance sheet total) and one available to larger businesses. It is the relief aimed at smaller businesses that is of more relevance to most companies.

In order to claim the relief the SME R&D project must represent an advance in the field of science or technology but this certainly does not restrict the relief to rocket scientists etc. Whilst there are prescriptive rules as to what qualifies, my experience is that the wide number and type of projects that qualify can be surprising. In fact, we have a significant number of one-man businesses that have made successful claims over the years that at first glance may not obviously have been eligible.

Qualifying R&D expenditure may include staffing costs; consumable items, software etc; subcontracted R&D; costs of externally provided workers; and clinical trial costs. Each category has its own rules as to calculation of expenditure, but once the figure is established the claim is a simple multiple of 2.30 of that figure.

If a company has insufficient profits in order to set off the extra R&D relief in the year then it may either carry back the loss one year, or carry it forward indefinitely. If the company’s prospects of profits in the short term are not promising, then instead it may opt for a repayment of a tax equivalent to 14.5% of the surrenderable loss. This tax free sum could be very useful from a company’s cash flow perspective.

The qualifying criteria, the detailed tax rules and the calculation of permissible amounts are certainly not straight forward, but the extra tax reliefs that can be obtained can be substantial. In my opinion there are probably many more owner managed businesses that could be claiming R&D relief than actually do. If you would like to discuss whether your company may be eligible then please call me on 01635 555666 or email c.davies@uhy-rossbrooke.com.

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