General

HMRC is serious about assisting companies obtain tax relief for Research and Development. Although the program has been in existence since 2000, many companies are unaware of the program, and many of those that are aware do not maximize their R & D tax relief claims. Both small and large corporations are eligible to claim R & D tax relief. HM Revenue & Customs administers the program and claims are made through corporate tax returns.

What is the definition of R & D under the tax relief program?

The first thing to understand is that program supports companies that develop or improve products or processes. The underlying technology does not have to be unique or the first of its kind. What qualifies is what we like to call "shop floor R & D".

Specifically, the criteria that must be met are as follows:

1. The technology being developed must constitute a technological advance in a particular field of science.
2. There must be technological uncertainty which must be resolved to achieve the advance.
3. The technology being developed must be carried out by competent and qualified individuals in a systematic manner.

While the above criteria are general, and sometimes difficult to apply in practice, the specific R & D projects that qualify are wide-ranging. The types of industries include, but are not limited to:

1. Manufacturing including: auto parts, plastics, aerospace, chemicals, robotics and tool & die.
2. Software and IT Development
3. Food and Beverage
4. Pharmaceuticals
5. Telecommunications

What are the eligible expenditures under the R & D tax relief program?

The following are examples of the types of expenditures that qualify:

1. Labour, including employees on payroll, amounts paid to staff providers and contractors.
2. Materials consumed or transformed.
3. Power, water and fuel.
4. Computer software.

There are special rules to determine eligibility with respect to each of the above categories of eligible expenditures.

What is the benefit to a company under the R & D tax relief program?

Essentially there are two schemes under the tax relief program. One scheme is for small and medium sized enterprises (SME) and the second scheme is for large corporations.

Generally speaking, an SME is a company with:

1. Fewer than 500 employees (250 employees prior to August 1, 2008) and
2. Annual turnover less than €100 million (€50 million prior to August 1, 2008) or
3. Total assets on the balance sheet totalling less then €86 million (€43 million prior to August 1, 2008).

Where an SME is a part of a related group of companies, the combined employees, turnover and assets must be. Aggregated for purposes of this test.

A large company is one that does not meet the definition of an SME.

SME

1 - Deduct 175% of qualifying R & D expenditures (150% prior to August 1, 2008)

or

2 - Tax credit 24% of qualifying expenditures subject to limitations relating to tax loss and PAYE liability (See below).

Large Companies

3 - Deduct 130% of qualified expenditures (125% prior to August 1, 2008)
Note: All companies may claim 100% of qualifying R & D capital under the R & D Allowance Scheme

Example

A company spends £100,000 on qualifying R & D expenditures:*

 
*Example is for expenditures incurred after changes to legislation in 2008.

**Restricted to:
1. 14% times is the lesser of
    a) enhanced expenditure
    b) tax loss and
2. PAYE liability