R&D

Question 1

What would we need to consider if something was to be treated as an SME for R&D purposes and what are some of the conditions.

Answer 1

So the first thing we would want to recognise would be if a company falls into the category of being and “SME” - the conditions for this would be:

• less than 500 employees
• less than 100 million euros turnover

If it was to then fall into this category it would then be know and an “R&D Intensive SME”

Once we have establish it is an SME - we now need to know if it qualifies for being an R&D intensive SME:

• for this it will need to have relevant R&D expenditure of at least 30% and,
• being loss making

at which point it will then be eligible for an additional 86% of relief - effectively being 186%

Question 2

If we have an R&D question, what are some of the eligible expenditure amounts available for relief and what do we need to consider

Answer 2

So the main thing we will want to work out is if relief has already been given as a taxable expense, this is important as the company effectively will receive 186% of relief on the qualifying expenditure. However, if the expense has already been deducted from the profits then we will want to make sure that they only get an additional 86% (as 100% has already been relieved)

Most and all expenditure that is incurred and is directly related to the R&D project will be eligible expenditure - the main thing we want to be cautious about is the fact that there will relevant percentages to the amount that expenditure is attributable to this R&D.

The main thing that will need be adjusted is any to non-connected parties sub-contracted work - this amount will be capped at 65% on the relevant expenditure and will need to be sourced from outside the UK (any amounts outside usually wont be available) / if the company is connected then we could make a joint election so that the full staff expenditure to be deductible

• if we have any amounts which refer to property etc we want to make sure that only utilities such as water, gas & electricity would be considered a qualifying expenditure - other amounts such as rent/rates/insurance are not considered allowable

Payroll expenses:
The amount of qualifying expenditure will again depend on how much of the time was spent on other projects and general admin. Qualifying amounts will be for the Salary/NIC/Pension but isn’t applicable for benefits in kind

Question 3

What the the PAYE cap for R&D claims and when is it not applicable

Answer 3

The PAYE cap is effectively HMRCs way of restricting the amount which can be paid out by this 14.5% calculation. This calculation is done by:

£20,000 + 3 x (Companies NICs & PAYE liabilities)

The main thing to note here is that it takes into account both class 1 PRIMARY & SECONDARY: this will include amounts for ALL staff in the company, even if they aren’t engage in the project / the PAYE & NIC of sub contracted work if they are a connected company / any staff amounts on a connected company providing subcontracted work.

This cap will not come into effect if the company is generating a form of intellectual property such as a registered design/patent etc & the amount of work subcontracted out to a CONNECTED COMPANY does not exceed 15% of the companies total qualifying expenditure

Question 4

How is the R&D tax credit calculated

Answer 4

So this is an alternative form of relief for an R&D intensive SME, instead of carrying the losses forward, they could look to get a tax credit from HMRC where they will either give a cash repayment or reduce the tax liability.

This rate is calculated at 14.5% and is given on the LOWER of the:
- Unrelieved trading loss (less any current year loss claims)
- qualifying expenditure incurred (this includes the 186% amount)

there is also a cap on the amount that can be paid out which is the PAYE CAP (which is not always applicable)

we then need to appreciate that this will effect our loss memo. where the amount of loss that has been used in the claim will need to be deducted from the amount of losses being carried forward

Question 5

What is the alternative form of R&D relief for an SME

Answer 5

this would be relief known as RDEC - with the main difference being that the company CAN’T be loss making.

The main way that this works is the qualifying R&D expenditure is added back as a taxable receipt. the way this is done is by multiplying the R&D expenditure by 20% (and this is what is added back).

this same amount (being the 20% of the qualifying R&D expenditure) is then deducted from the total tax liability.

We also need to be mindful that if there is no tax liability to be offset then a tax credit can be received and this is done by:

The RDEC (being the 20% outlined above) - (RDEC x notional rate) with the notional rate being the amount of tax they would pay outside the RDEC taxable receipt. This is also subject to the PAYE cap and any other HMRC liabilities outstanding

Question 6

What is the RDEC cap for a cash repayment

Answer 6

The RDEC Cap is based on the lower of the following 3:

Notional method:
The cap for an RDEC repayment will be the RDQE (qualifying expenditure) less RDEC at the notional rate:

so this is effectively the qualifying expenditure x 20% x notion rate (being 100% - tax rate) and this would be the limit on the cash payment which can be received.

The notional rate is the effectively the rate they would pay CT tax out with the RDEC reduction. If this would still be nil then we would be using 19% as our notional rate

Unrelieved RDEC:
just being the RDEC remaining once the tax liability was nil

PAYE CAP:
being the £20,000 + 3 x (PAYE + NIC liabilities)

Question 7

What are some of the obligations/reporting instructions for an R&D claim

Answer 7

1. If an R&D claim is to be made after 6 months from the end of the accounting period in which the claim will be for, they must notify HMRC that they will be making a claim.
2. A claim, amendment or withdraw can be from up to two years from the end of the accounting period in which the claim relates to (just like a normal amendment)
3. The claim must be shown on the companies CT600L
4. The company must also support an Additional Information Form (AIF) to HMRC alongside the CT600

Question 8

What do we need to be careful about in regards to the eligibility of an R&D claim

Answer 8

1. In the event that a project does not succeed, this will still be a qualifying event. it has nothing to do with the outcome and everything to do with the intentions (develop an unknown area etc)
2. If a company is part of the subcontracted claim, then they can not claim for R&D relief themselves (regardless of whether the event is qualifying or not) - it will be on the company who sub-contracted the work out to make the claim