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Why R&D might benefit a Small and Medium Sized Entity (SME)
Because and SME can obtain a 44% tax relief on activities classified as R&D, as against the standard 19% tax relief on operating costs. Where a company is loss making, the benefit can be taken as cash (usually paid within 28 days of submission), albeit at lower rates as below:
|Type of expense||tax saving||OR cash payment by HMRC|
|Non R&D spend of £100 (internal or sub-contracted cost)||£19||Not available|
|R&D spend of £100 internal cost||£44||£33.4|
|Extra benefit of R&D scheme (for every £100 spent)||£25||£33.4|
|R&D spend – £100 subcontracted||£36||£21.7|
|Extra benefit of R&D scheme (for every £100 spent on sub-contracts||£17||£21.7|
What might be classified as R&D?
On first reading, the requirements to qualify for R&D, as listed below, may appear daunting. However, our team knows exactly what’s possible having submitted thousands of such claims.
“R&D takes place where a project attempts to achieve an advance in science or technology”. This can be tangible (new product or process) or intangible (new knowledge). What is key is that there exists a level of difficulty or technical uncertainty over whether this new development will work and that finding a solution would not be readily deducible by a competent person. Whether something will sell commercially (eg due to a lack of demand) is not relevant for R&D claims. Expenditure on failed technical trials would usually count whilst a financial appraisal of different investment options wouldn’t.
The sort of projects which qualify and might be relevant for an SME include:
- Resolution of conflicts with h/w or s/w where the existence of a problem area and the absence of a known solution have been documented
- The creation of new or more efficient algorithms whose improvements depend on previously untried techniques
The sort of projects which wouldn’t qualify include:
- The creation of s/w that replicates an established paper process
- The visual presentation of data to users
- The creation of websites or software using tools designed for that purpose
The types of expenditure to be included are usually:
- Direct labour costs (including National Insurance and pension costs)
- Certain support staff (where they directly support a project, not tasks they would do anyway (eg bookkeeping)
- 65% of subcontractor costs (unless they come from a connected – majority controlled – company in which case 100% applies)
- S/W costs (100% if exclusive to the project, apportioned if shared with other parts of the business)
- A proportionate share of utilities and materials used by the project
Excluded costs are:
- Rent and rates
- Capital expenditure
- Production and distribution of goods or services
Any R&D tax credits payable will be reduced by any existing arrears on other tax payments
(i) including any deferred liabilities whose agreed future payment dates form part of a Time To Pay (TTP) schedule previously agreed with HMRC
(ii) excluding any VAT or Interim Income Tax payments deferred by HMRC as part of the Coronavirus initiatives.
To avoid fraud and from 04/2021, HMRC proposes to reintroduce a cap on R&D tax credits payable amounting to 300% of the company’s annual PAYE and NI liability which corresponds to the year of the R&D claim. It is further proposed that a £20,000 de-minimus limit will apply so that claims below this level will not need to pass such a test.
To the extent that potentially qualifying labour costs have been reimbursed by Covid grants, these cannot count towards an R&D grant claim.
All travel expenses included in R&D claims need to be paid by employees and then reimbursed by their companies, otherwise they’re classified as company overheads and not reclaimable.