Whilst Research and Development (R&D) spend by UK companies is increasing, many companies, despite being eligible, are still not claiming the tax reliefs available.
The benefits of claiming can be significant, with increased deductions for qualifying expenditure and payable tax credits offering a cash injection to the company, freeing up funds that would otherwise be tied up.
In the Agricultural sector, due to the often practical nature of the work carried out and the structure of the businesses concerned, the potential for R&D tax relief is not always easily identified and the opportunity for relief may, as a result, be lost.
What is R&D?
Where a company is carrying out work to create new products, processes or services or modifying existing ones there is a good chance that this work would qualify as R&D.
The work carried out should be innovative and look to resolve a scientific or technological problem however, whilst this conjures up images of scientists working in laboratories, the scheme is far wider ranging than this.
In the Agricultural sector, this could be work carried out in areas such as the development/ improvement of products and processes in areas such as husbandry, livestock management, feeding and nutrition systems, crop management, crop production etc. Examples of this include:
- Experimenting with new techniques to enable crops to grow that would not traditionally be suited to the British climate.
- Testing unconventional growing mediums.
- Creating disease-resistant crops.
- Developing or modifying agricultural machinery and equipment.
- Trialling new growing techniques to minimise the use of pesticides.
- Experimenting with new renewable energy technology.
What R&D tax incentives are available?
For small or medium sized businesses (SMEs), R&D tax relief may take two forms:
- Enhanced revenue deduction – this allows the company to deduct 230% of the qualifying revenue expenditure when calculating their taxable profits, providing tax relief of 43.7p for every £1 of qualifying costs.
- R&D tax credits – alternatively, where the business incurs a trading loss in the relevant accounting period, they may surrender the loss for a 14.5% repayable tax credit, i.e. a cash payment of 33.35p for every £1 of qualifying costs.
Following announcements in the recent Budget, with effect from 1st April 2021, the total amount of tax credit payable to SMEs will be capped at £20,000 plus 3 x the total PAYE and NIC liability for each period.
Qualifying expenditure refers to costs that relate directly to the R&D activity such as staffing, software, consumables and subcontracted R&D costs.
Where capital expenditure related to the R&D activity is incurred, a 100% R&D Allowance is available.
What about large companies?
While this article focuses on the R&D incentives available to small or medium sized companies, R & D tax incentives are also available to large companies under the R&D Expenditure Credit Scheme (RDEC).
This scheme may also be available to small or medium companies who are unable to claim the SME R&D incentives due to having received funding from sources which prohibit their claim or being subcontracted to carry out R&D work on behalf of a large company.
While the tax credit is less favourable and is subject to corporation tax, it could still provide a significant benefit to the business at 10.53p per £1 of qualifying expenditure.
What if the business is not being operated as a company?
Where unincorporated businesses, such as sole traders or partnerships, are likely to incur qualifying expenditure it may be worth incorporating all or part of the business if the amount of relief concerned is likely to be material. Incorporation does, of course, have wide ranging implications and full consideration would need to be given to these when deciding on the most beneficial course of action and the most suitable structure for the business.
How do I check eligibility and claim these incentives?
Working with specialist colleagues, we can assist in considering projects in your business that may be eligible and help to formulate claims as part of the corporation tax process. To discuss the possibilities for your business further please contact email@example.com or speak to your usual Rennie Welch contact.
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