R&D Tax Relief: Misunderstood and under claimed

This blog post highlights some common misconceptions regarding R&D tax relief.

My company is loss making therefore R&D tax relief will not be beneficial

Loss making companies often feel that the only benefit they will obtain from Research and Development tax relief claims is increased losses carried forward for offset against future profits.

However, companies qualifying under the SME scheme can in fact surrender losses for a repayable tax credit at 14.5%. The loss available for surrender is the lower of the unrelieved trading loss or the enhanced R&D expenditure.

As an example a company with £100,000 of qualifying R&D spend and an unrelieved trading loss of £250,000 could surrender £230,000 (being the original £100,000 and the R&D enhancement of 130%) at 14.5% and receive cash from HMRC amounting to £33,350 despite not paying any Corporation Tax in the period.

My company is receiving grant funding so R&D tax relief is not available

R&D tax relief may still be claimed even if there is no economic risk to the claimant company as their costs are covered by grant or other funding.

Depending on the type of funding received companies can claim under the RDEC scheme or split the claim between the SME and RDEC schemes.

On the scenario that the company is fully funded, for every £100 of qualifying R&D spend, the tax saving or repayable tax credit would be £9.72, resulting in an effective cost of £90.28.

My company is not undertaking Research & Development

The definition of R&D for R&D tax relief purposes is not the same as the accounting definition and is in fact much wider. Many companies believe the work they are undertaking is simply ‘what we do’ and would not qualify for any reliefs. As such many companies are missing out on tax relief that they could be claiming. Qualifying activities include:

• Development of new processes, products and services
• Appreciable improvements to existing products
• Process improvements in the production of existing products
• Adapting existing products and services

AAB can work with you to establish whether your company qualifies for any of the reliefs.

We do not have the time to consider R&D tax relief

Innovative companies who qualify for R&D tax relief are often too busy with the day job to consider making a claim for R&D tax relief.

AAB can assist with this problem making the claim process as efficient and straightforward as possible.

The company R&D costs are capitalised as Intangible Fixed Assets therefore R&D tax relief is not available

Many companies capitalise their R&D expenditure within Intangible Fixed Assets. For those costs that are revenue in nature, R&D tax relief can still be claimed. In addition, a tax deduction can immediately be claimed for the eligible costs which have been capitalised as Intangible Fixed Assets. Effectively, although these costs have been capitalised, for tax purposes they are treated as being fully deductible as they are incurred.

Internal and unsuccessful projects do not qualify

The project does not have to be externally driven to qualify. It must however be for the furtherance of the trade. For example appreciable improvements to internal processes through an advance in technology could constitute a qualifying project.

Projects which fail and are not completed can still qualify. The very nature of R&D tax relief is that it is based on risky projects where the goal sought might not be achieved. Therefore the costs incurred on failed projects may still qualify for R&D tax relief purposes.

If you have any queries about R&D tax relief, please contact Derek Gemmell, or your usual AAB contact.