Many businesses carry out activities relating to research and development (R&D) without realising that they are doing so and that they may be able to benefit from valuable tax relief as a result.
Whilst the term “research and development” conjures up images of complex projects undertaken by scientists in laboratories, this is a common misconception. In reality, a large amount of R&D work is carried out by small businesses while seeking to develop new, or improve existing, products, processes, services and systems.
R&D tax relief is a Corporation Tax relief and as such is only available to those businesses operating as limited companies. 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.
In order for a project to qualify for R&D tax relief, it is not sufficient for the product or service to be commercially innovative but rather it must seek to achieve an advance in the field of science or technology. This could also include the adaptation of science or technology from another field for a new purpose. The project does not necessarily need to be successful for the relief to apply.
Agricultural businesses may, for example, incur R&D expenditure in connection with the development or improvement of products and processes in areas such as husbandry, livestock management, feeding and nutrition systems, crop management, production etc., while businesses operating within the food industry may incur expenditure in areas such as the development of new techniques or flavours.
For small or medium sized businesses, 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 up to £46 for every £100 of qualifying costs.
- R&D tax credits – alternatively, where the company incurs a trading loss in the relevant accounting period, they may surrender the loss, subject to certain restrictions, for a 14.5% repayable tax credit, i.e. a cash payment of up to £33.35 for every £100 of qualifying costs.
Qualifying expenditure refers to costs that relate directly to the R&D activity such as staffing, software, consumables (including water, fuel and power) and subcontracted R&D costs.
Where capital expenditure is incurred, a 100% R&D Allowance may be claimed in the relevant accounting period.
Rennie Welch LLP accepts no liability on the basis of this article and professional advice should always be sought based on specific circumstances. For advice or assistance please contact Lynn Miller at Rennie Welch LLP either by email at firstname.lastname@example.org or by telephone on 01573 224391.
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