HOW TAX RELIEF WORKS

HOW TAX RELIEF WORKS

MSC R&D PAID-ON RESULTS; FAST-TRACK PROCESS; EXPERT TEAMS

Initial Meeting

Analysis

Facts and Figures

Submissions and Review

Approval

How R&D Tax Relief works

If a company incurs qualifying expenditure (in categories such as staff costs) on R&D it can enjoy an extra deduction from its taxable profits, so its corporation tax bill will be reduced. If the tax has already been paid, then a refund will be received from HMRC

For SMEs the rate of enhanced deduction is currently an extra 130%– meaning a cash saving of 26% of the eligible R&D cost. Not all SMEs (and particularly early stage start-ups) will have taxable profit, so an extra deduction from taxable profits would not be of immediate use to them.  Instead loss making SMEs can convert their losses (attributable to qualifying R&D spend) to cash, at a rate that currently amounts to approximately 33% of their qualifying spend on R&D

These reliefs for SMEs are very valuable and can provide cash at a critical stage to support  the continuing R&D effort.

For large companies there is an equivalent scheme which allows an extra deduction of 30% of the qualifying spend from taxable profits.  There is no option to surrender losses for cash under this scheme, but it is in any case being phased out in favour of the new and improved R and D expenditure Credit (RDEC) which provides a cash payment (taxable) of 11% of the qualifying R&D expenditure instead of a deduction from taxable profits. This credit is available even if the company has no other taxable profits

 


The rules of R&D Tax Credits

Of course there are rules.

The expenditure has to be on qualifying R&D, in line with a published definition. This definition is a broad based one that goes well beyond blue sky R&D and includes technological and software development up until the technological problems have been solved, and you have something which only requires minor adjustments before it can be used or  commercially released.

The expenditure on this R&D then has to be checked to make sure it is revenue in nature (rather than capital),  and meets rules covering what expenditure qualifies –  so for example there are special rules concerning subsidized or subcontracted expenditure, and rules defining  what expenditure falls into eligible categories

 


How to claim the R&D Tax Reliefs

Generally speaking you have two years from the end of an accounting period to claim the R&D relief for expenditure deducted in that period.

A company can  prepare and submit its own claims. However that means they have to understand how the R&D definition is applied in practice, master the detail of what expenditure qualifies under the rules, and also understand how to present this so HMRC understand it and are satisfied by it.

The alternative is for you to do what you do best – develop the technology and run your company – and to use a specialist like MSC R&D to prepare the claim for you.

 

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