Research & Development Tax Relief
“I have been working in corporation tax for such a long time that I remember the introduction of this relief back in 2000. So, I am still amazed of the level of claims that are left unconsidered by many manufacturing and construction companies we speak to. I have long been of the opinion that, if you make something, you are probably doing R&D.”
- Glen Thomas, Tax Partner
Working in property and construction often requires you to be creative and innovative when faced with certain problems, to arrive at a solution that is both effective and cost efficient for you and your client.
All too often organisations undertaking such work do not consider that they may be eligible for research and development (R&D) tax relief.
The financial benefits of being able to make a claim are considerable as explained below:
Any development work where your personnel face considerable technological challenges, provided the solution is not available to, or readily deducible by, a ‘competent professional in the field’, has the potential to qualify for the enhanced tax relief. For small and medium sized businesses (SMEs) this takes the form of an additional tax deduction calculated as 130% of qualifying revenue costs and provides a net tax benefit of 24.7% for profitable companies.
For loss making companies, a generous cash credit of effectively 33.35% is available for every £1 of qualifying expenditure.
For larger companies (over 500 employees and either €100m turnover or €86m gross balance sheet) the benefit is claimed under the Research & Development Expenditure Credit (RDEC) regime. This relief is not as generous as that applying to the SME regime but can still result in a repayable amount for a loss-making company.
A taxable “above the line” credit of 12% of any qualifying R&D is recognisable as additional profit. The effective benefit is 9.72% of the spend. For loss making companies, the 9.72% is available as a cash credit.
Capital spend on R&D should not be overlooked as there is an immediate deduction available for capital R&D expenditure. This gives a significant cashflow benefit when compared to other allowances where, at best, the relief is given over 10 to 15 years, and at worst, not at all.
So, if you have got this far, you are probably wondering how the activities regularly undertaken by your company can qualify for R&D relief...
Type of expenditure
Qualifying revenue expenditure includes primarily the salary costs (including employers’ NI, pension contributions and some expenses) of employees directly and actively involved in the R&D and also where undertaking certain supporting activities.
The legislation also allows the cost of consumable items and a proportion of contract staff costs, software licences and power, heat and water used in the R&D projects to be claimed.
The SME relief allows claimants to include the costs of R&D subcontracted to third parties but R&D which is funded or subsidised is not eligible for the enhanced SME deductions.
SMEs can however make claims under the large company regime for some expenditure that is excluded from the SME scheme. For both, there is no requirement to own the IP.
Some examples of qualifying activities include:
- Early concept development; making buildings more responsive to the environment, exploiting solar gains, daylight, night-time air for cooling, and passive ventilation strategies for internal comfort (e.g. developing glazing and rooflight design, including locating and sizing the glazed elements to provide optimum daylight and thermal properties)
- Work involved meeting the required BREEAM ratings, i.e. overcoming system uncertainties in designs and conducting thermal modelling and CO2 reduction calculations
- Integrating new technologies into buildings whilst ensuring that the other required building services are sourced, can be installed and effectively commissioned. Significant levels of system uncertainty can arise in such cases because of the number of different complex elements involved making it difficult to predict how the components will interact
- Remediation of contaminated land, either where there are specific unknowns (e.g. unstable slopes, liquefaction potential, or how to dispose of contaminants) or where projects are being carried out at a significantly reduced cost (both financially and environmental) compared to other proposed routes. It may be possible to claim both R&D relief AND the additional relief for land remediation work on the same.
The above might seem like a very specific list however we would say that there is likely to be R&D where you are overcoming unforeseen problems during the build (e.g. erosion of materials due to gas or water vapour ventilation, or air conditioning units not operating effectively due to bespoke casings).
We regularly remind our clients that trial and error is usually an indication that R&D activity is being undertaken, and that R&D does not necessarily need to be successful to qualify.
To find out more
If you would like to discuss the above topic further, please speak to Glen Thomas.