Research and Development Tax Credits

Research and development (R&D) tax relief is intended to drive UK productivity by encouraging innovation.

R&D tax credits and relief are available to businesses for expenditure of a revenue nature (that is, expensed through the profit and loss account) on R&D activities related to a company’s trade.

 

Subject to the detailed rules, this can include expenditure on:

• Staff costs (i.e. salaries etc.)
• Consumable items (i.e. materials or equipment consumed during the R&D process),
• Software used in the R&D, and
• Payments to externally provided workers/sub-contractors carrying out R&D for the business.

 

 

 

Rate of Tax Relief or Credit

• The tax relief on allowable R&D costs incurred after 1 April 2011 is 200%.

 

• For every £100 of qualifying costs, your company can reduce its corporation tax by an additional £100 on top of the £100 spent.

• If there is a taxable loss for the period, this can be increased by 100% of the qualifying R&D costs.

 

• This loss can be carried forward in the normal way and offset against future taxable profits or can be converted to tax credits payable to the company by HMRC.

Illustration 1

R&D Relief for expenditure of £20,000 where the company has made a profit of £25,000:

Calculation Step	Amount
R&D Expenditure	£20,000
R&D Relief	£20,000 x 100% = £20,000
Normal taxable profits	£25,000
Taxable profit less R&D relief	£25,000 - £20,000=£5,000
Revised taxable profits	£5,000

Illustration 2

If your company makes a loss, the company can choose to receive the tax relief by way of tax credits – a cash sum paid to the company by HMRC.
Converting R&D Relief on expenditure of £20,000 to a tax credit payment:

Calculation Step	Amount
R&D Expenditure	£20,000
R&D Enhancement	£20,000 x 100% = £20,000
Normal taxable profit	£5,000
Trading loss (after R&D Relief)	(£15,000)
R&D Expenditure qualifying for conversion to credits	£15,000
Potential Tax Credit	£15,000 x 14% = £2,100
PAYE and NIC’s liabilities (say)	£5,000
Payable tax credit	£2,100

 

 

"For every £100 of qualifying costs, your company can reduce its corporation tax by an additional £100 on top of the £100 spent."