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What are R&D tax credits?
R&D tax credits are a Government incentive in the form of tax relief designed
to encourage businesses to invest more in R&D. They can either reduce a company's
tax bill, or for some small or medium-sized companies not in profit, provide a cash
sum.
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Who can claim R&D tax credits?
All companies spending over £10,000 per annum on R&D (as defined for tax purposes) are entitled to a deduction when calculating their taxable profits of
- 150% of qualifying expenditure for small and medium-sized companies, and
- 125% of qualifying expenditure for larger companies.
The tax credit is not available to individuals or partnerships.
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Why can only companies get R&D tax credits?
R&D tax credits work by reducing a company's corporation tax bill, a process that is simple and efficient for companies. Almost all significant R&D activity carried out by SMEs is undertaken by companies.
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What is the aim of R&D tax credits?
The aim of the tax credits is to encourage companies to invest more in business R&D, hence resulting in an improvement in the rate of innovation in the UK. Since the tax credits were introduced in April 2000, over 18,000 claims have been made with over £1.3bn of support claimed by R&D companies.
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What is qualifying R&D?
A basic definition is "work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology". Advances include new or improved products, processes and services.
To qualify for the tax credit, the R&D must be treated as R&D under generally accepted accountancy practice, and fall within the guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry.
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How do R&D tax credits work?
The R&D tax credit works by allowing companies to deduct 150%
(under the SME scheme) or 125% (under the large company scheme) of qualifying
expenditure on R&D activities when calculating their profit for tax purposes.
There must be a minimum qualifying expenditure of at least £10,000 on R&D in
the relevant accounting period in order for a claim to be made. There is no
upper limit on the amount of the claim.
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What is qualifying expenditure for R&D tax credit purposes?
Companies can claim R&D tax credits for their revenue expenditure on
- employing staff directly and actively engaged in carrying out R&D,
- paying a staff provider for staff provided to the company who are directly
and actively engaged in carrying out R&D,
- consumable or transformable materials used directly in carrying out R&D
(broadly, physical materials which are consumed in the R&D), and
- power, water, fuel and computer software used directly in
carrying out R&D.
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How can I claim the tax credit?
A company claims R&D tax credits in its company tax return (Form CT600).
For your first claim, you may want to seek professional advice.
Full details of the R&D tax credit legislation, including how to claim, are
provided in the
HM Revenue & Customs
Corporate Intangibles Research and Development (CIRD) manual.
Alternatively, information can be obtained by contacting your
Local Tax Office
Corporation tax team.
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Can company losses increased by R&D
tax credit claims (e.g. for a large company not in profit) be rolled forward?
Basically, yes, although there are some restrictions on how those losses can be used and you may want to seek professional advice.
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May I claim R&D tax credits as well as the Grant for R&D?
The Research Project grants and Development Project grants (including Exceptional Projects) given through the Grant for R&D programme are notified State Aids, which means a claim for SME R&D tax credits cannot be made for a project for which one of these grants has been awarded. However, a claim can be made under the 'large company' R&D credits scheme for that project, including R&D funded by this grant, subject to meeting all the conditions generally of eligibility for R&D tax credits.
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What are the main characteristics of the two R&D tax credit schemes?
Differences between the SME and large company schemes
| SME scheme |
Large company scheme |
| 150% rate of enhanced deduction |
125% rate of enhanced deduction |
| Payable credit at £24 for every £100 of qualifying expenditure on R&D |
No payable credit |
| Company can claim for expenditure on R&D it sub-contracts to others |
Company can only claim for expenditure on R&D it carries out itself, unless it sub-contracts R&D to universities, charities or public sector research establishments |
| Company cannot claim for contributions to independent research |
Company can claim for contributions to independent research |
| Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it |
No reduction for grant or subsidy |
| Company must own the intellectual property arising out of the R&D |
Company need not own the intellectual property arising out of the R&D |
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Where can I get further information on R&D tax credits?
Detailed information about the R&D tax credits is available via the HM Revenue & Customs website. Alternatively, help is available by contacting a tax inspector at your local tax office. Information on what constitutes R&D for tax purposes is contained in the guidelines on the meaning of R&D for tax purposes issued by the Secretary of State for Trade and Industry. There are also other sources of advice available, for instance from Trade associations and professional networks, or from company accountants and financial advisers.
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