Research & Development (R&D) Tax Credits
R&D tax credits are a company tax relief, which can either reduce a company's tax bill or, for some small or medium sized companies, provide a cash sum. The aim of the tax credits is to encourage the growth of innovative companies.

There are two different tax credit schemes, the small and medium-sized enterprise (SME) scheme and the large company scheme. The SME scheme applies to spending after 1 April 2000. The large company scheme applies to spending after 1 April 2002.

Definition of R&D for tax credit purposes
R&D has a specific statutory meaning for the purpose of the tax credits that is not the same as the commercial meaning of R&D.

For the purpose of the tax credits R&D takes place where a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. It is not sufficient to achieve an advance in a company's own state of knowledge or capability alone.

Only revenue type expenditure is included in the tax credit relief - relief for R&D capital expenditure may be available under the R&D capital allowances scheme [insert link to R&D capital allowances page].

Read about the meaning of R&D for tax purposes at the HMRC website

Definition of SME for tax credit purposes
The definition of a SME is that used by the European Commission. Briefly, an SME is a company with fewer than 250 employees, and either annual turnover not exceeding €50M or a balance sheet total not exceeding €43M, and which is not part of a larger enterprise that would fail these tests.

Definition of Large Company for tax credit purposes
A large company is any company that does not meet the SME definition. However, there are some cases where an SME doesn't qualify to claim under the SME scheme but can obtain relief under the Large Company scheme.

SME Tax Credit
An SME can receive a tax deduction in its corporation tax return amounting to 150% of the qualifying R&D expenditure. If the deduction adds to or creates a tax loss then the loss can be surrendered in exchange for a cash payment of up to 16% of the loss.

Conditions for the SME relief
The relief is subject to a number of conditions the main ones being:

Large Company tax credit
Under this scheme a company can claim a tax deduction amounting to 125% of its qualifying R&D expenditure in its corporation tax return. For this scheme there is no payable cash credit.

This relief is also available to SMEs who didn't qualify for the SME relief due to:

Claiming the relief
In both cases the relief is claimed in the Corporation Tax return (form CT600).

Effective management of the R&D claim
The rules surrounding both reliefs are complex and in the past many companies have had unsuccessful, delayed or reduced claims due to

R&D Capital Allowances
R&D Capital Allowances are available on certain capital expenditure, incurred by both companies and sole-traders, which meets the HMRC definition of Research and Development. To find out more about R&D capital allowances, click here.

The team at Andrew Webster Limited have considerable experience in handling R&D Tax Credit claims and with early involvement we can advise you on all of the issues detailed above to improve the likelihood of a successful claim.

To find out more about R&D Tax Credits and to use our R&D related services , please call (0) 1223 507080 or email info@tax.uk.com