Companies of all industries should take steps to understand if and how the research and development (R&D) tax relief programme relates to their business.

At present companies can go back up to six years to make retrospective R&D claims. This time frame will be shortened to two years, however, from March 2008. It is very important for companies who have yet to make claims to take the necessary steps to submit for their earlier accounting periods.

After-tax benefit 

The relief for SMEs is available in two forms:

• For profitable small and medium-size companies an after-tax benefit of between 10 and 15 per cent of the R&D expenditure identified is available, depending on your corporate tax rate. From April 2008 the benefit is enhanced and can be as much as 21 per cent of the expenditure identified.
   
  
• For loss making companies the benefit consists of a cash refund of up to 24 per cent of the R&D expenditure identified. Therefore, even if your company does not pay any corporation tax the government will send you a cash cheque for your R&D work.

Large companies can claim an after-tax benefit of about 7.5 per cent of the R&D expenditure identified under the Large Company Scheme, assuming a 30 per cent tax rate. From April 2008 this benefit is increased to about 8.4 per cent of the expenditure identified. For large companies there is no refundable cash cheque if you are loss making.

Claims for R&D tax relief and R&D tax credits are done through the corporate tax system.

The first step is for claimants to identify which aspects of their development work or research activities meet the definition of R&D for tax purposes.

Improving existing products

Only iterative R&D activities that achieve an advance in science or technology through the resolution of technological uncertainty are eligible under the programme. The programme applies to companies of all industries and encompasses pure research, applied research and experimental development activities.

If your business is creating new or improving existing products, processes, materials, devices or services you are probably eligible to make a claim on that work.

The second step in the claim process is for claimants to identify expenditure which directly relates to R&D activity. Claimable expenditure can include:

• Staff expenditure (including base salaries, bonuses, employer’s NIC)
• Externally Provided Worker expenditure
• Consumable expenditure (materials, water, fuel, power)
• Subcontractor expenditure
• Software expenditure
• Payments to the subjects of a clinical trial

In certain cases expenditure must be apportioned to be more representative of the amount of R&D undertaken.

The final stage of the claim process is to enhance the R&D expenditure identified by 50 per cent in the case of a SME claim or 25 per cent in the case of a claim under the Large Company Scheme.

Due diligence 

This enhanced expenditure is pushed through the corporation tax computation. This generates tax saving in the case of claims made under the Large Company Scheme and either tax saving or refundable tax credits for claims made under the SME Scheme.

Claimants need to perform some due diligence on the R&D claims they submit to HM Revenue and Customs (HMRC). This includes identifying the scientific or technological advance achieved in the project and the technological uncertainty resolved. The claim should also identify the type and amount of the expenditure claimed.

This due diligence should accompany the tax computations and tax returns submitted to HMRC as part of the corporate tax return submission process.

HMRC have set up specialist R&D tax offices around the UK which are assigned to specific postal codes. Claimants should identify which specialist office deals with their postal area and submit their tax returns and claims to these specialist offices.

Greg Howe is UK operations director at Braithwaite Tax Recovery Consultants.

Related links

• Braithwaite Tax Recovery Consultants