Research and development: what does it really mean?

It is now some six years since the government introduced enhanced tax relief for qualifying expenditure by companies on research and development (R&D). Since 2000, small and medium-sized companies (SMEs) have been able to claim tax relief on 150% of qualifying R&D costs or surrender the relief for a cash repayment of up to 24% of the costs. Large companies (since 2002) have been able to deduct 125% of their R&D costs in calculating taxable profits but do not have the cash repayment alternative.

Broadly qualifying costs include employment costs of staff working on R&D, and ‘consumables’ including software and power. Capital expenditure does not qualify but may be eligible instead for enhanced capital allowances.

The number of R&D intensive middle-sized UK companies has increased by more than 75% over the past four years according to the DTI’s annual R&D Scoreboard. Despite the statistics it seems that many companies are failing to claim the reliefs due to them.

This may be because they perceive that what they do is not R&D. But some manufacturing companies have successfully claimed relief where they have undertaken a project to research making an existing product at lower cost. And it may not matter if the project does not reach a successful conclusion. It is the attempt to achieve a scientific or technological advance that is important not the end result.

Having said all of this, the Revenue are likely to challenge claims and may require extensive back-up documentation. They also report that the most frequent errors in R&D claims are as follows:

claiming expenditure outside the qualifying categories
claiming overheads that do not qualify as ‘consumables’
claiming under the SME scheme when other State Aids have been received
claiming a repayment in excess of the total PAYE and NI liability of the company for the relevant year.

The Revenue have recently announced a number of proposed improvements to the regime including the creation of dedicated teams to deal with claims. They have also produced a helpful flowchart to indicate whether a project is likely to qualify for the relief. It can be found at: www.hmrc.gov.uk/randd/flowchart.htm

Finally we would be delighted to discuss with you the detail of your company’s projects and possible claims for R&D credits.