How to get Government Rebates on Your Development Costs - R&D Tax Credits
1.
2.
3. HMRC defines R&D activities as those which:
“Directly contribute to achieving an advance in science or technology
through the resolution of scientific or technological uncertainties”
An advance in technology does not necessarily mean ground
breaking, innovative or novel work. The changes to a product
may qualify if a company is making something:
cheaper
faster
smaller
larger
longer
more efficient
4. HMRC look at four key areas when ascertaining whether a company has
undertaken R&D:
1. Whether there has been a scientific or technological advance
2. What the uncertainties are
3. How the uncertainties were overcome
4. Whether the knowledge being sought was readily deductible for a
competent professional
5. Transferring a desktop software package to a cloud based system
Developing an online fully integrated apartment letting and management
system
Creation of remote wireless EPOS system
In-house development of stock management/EPOS system
Development of new formula for slug pellets due to a change in legislation
Development of bespoke manufacturing machinery for the manufacture of
chemicals
Development of bespoke laser modeling products
6. SME scheme:
Companies with turnover up to €100 million
Balance sheet up to €86 million
Less than 250 employees
225% of qualifying costs
If loss making a credit of 11% is available
Subcontractors under large scheme
Large company scheme:
130% of qualifying costs
7. Staff costs (including employers National Insurance Contributions)
External workers and subcontractors (65% restriction)
Consumable or transformable materials
Payments made to external workers
Computer software licences and fees directly attributable to the R&D
work
Heat, light, power, water and fuel used directly in carrying out R&D
Where capital assets are acquired that are used solely for R&D
purposes, the costs of these assets will qualify for capital allowances at a
rate of 100%
8. Registering as a limited company
Payment of salary to Directors of business (following changes on 1 April
2012)
2013/14 –
NIC’s £7,748
Income Tax £9,440
Corporation tax deductible
Post to Directors’ loan account if no cash available
9. EXAMPLE:
New start up company with two shareholders/directors both
undertaking R&D in company. Salary paid to both of £7,700 per
annum, company not yet making sales and so loss making:
Total salaries = £15,400
Uplift for R&D claim = £34,650
11% surrendered credit = £3,811.50
HMRC pay the company £3,811.50 for R&D work, no personal or NIC
liability arises, individual has loan account upon which to draw down on
in the future tax free!
10. Made via corporation tax computation
Report should be produced to support claim in case of HMRC enquiry
Can claim for previous 2 accounting periods
Keeping of projects sheets will aid claim process
11. A B C
Profit of company £300 £300 £300
R&D expenditure - £100 £300
Enhanced relief - £125 £375
Adjusted profit £300 £175 (£75)
Corporation tax £60 £35 (£8)
Tax saving - £25 £68
12. Patent Box
Providing 10% tax rate to companies obtaining an income from
patents
Effective from April 2013
‘Above the line’ R&D Tax Credit Scheme
13.
14. Magma is a leading independent firm of Chartered Accountants and Chartered Tax
Advisers, providing a wide range of professional advisory services to owner managed businesses
and private individuals via six integrated service areas: Audit and Assurance, Business
Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth
Management.
Extensive experience in advising companies and individuals on Share Option Schemes and
Research and Development Tax Reliefs in various sectors including
retail, engineering, technology, property, manufacturing and IT.
16. This document has been prepared as a general high level summary of some points of the R&D
tax relief legislation. It has been written for information purposes, should not be considered to
be exhaustive and should not be relied upon or be a substitute for professional advice which
should be sought. No liability or responsibility is accepted for loss or damage incurred as a
result of acting or refraining from acting upon anything contained in or omitted from this
document. This document does not constitute taxation, legal, financial or investment advice.
Editor's Notes
Purchase small co no track record no quick exityou will not have controlMinority shareholder - consider timing of share issues here.Appointment and removal of directors – 30%You may not have board representation (only one vote if you are)SEISCan’t be an employeeCan be a paid director (before or after investment)EISCan’t be an employeeCan be a paid director after investmentCan’t be a paid director before or after investmentRelianceRepresentations and warrantiesEmployees (25 SEIS, 250 EIS)
Purchase small co no track record no quick exityou will not have controlMinority shareholder - consider timing of share issues here.Appointment and removal of directors – 30%You may not have board representation (only one vote if you are)SEISCan’t be an employeeCan be a paid director (before or after investment)EISCan’t be an employeeCan be a paid director after investmentCan’t be a paid director before or after investmentRelianceRepresentations and warrantiesEmployees (25 SEIS, 250 EIS)