Market research for small companies

small companies' research and development tax credit and how to research small companies
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Dr.ThorasRyder,Hong Kong,Researcher
Published Date:07-07-2017
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Research and development tax relief Making R&D easier for small companiesContents Making R&D easier for small companies 3 How to claim R&D relief 26 Background 4 How to calculate your claim 28 Keeping records 31 What is R&D tax relief? 5 Is my company small or large? 7 Advance Assurance 32 Does my company have linked or partner companies? 8 Case Studies 34 Which projects qualify? 10 The Agri-food Sector 35 How to show that your project is R&D within the tax definition 12 ICT 36 The start and end of a project for R&D tax purposes 14 Advanced materials 37 Advanced engineering 38 What costs qualify? 16 Life and health sciences 39 What costs do not qualify 19 Construction 40 Subcontracted R&D 20 Further help 41 Subcontracting — who can make a claim? 22 Grants and subsidies 23 Frequently asked questions 42 More on grants and subsidies 24 Glossary 43 Why is RDEC important to SMEs? 25 2 Research and development tax relief: Making R&D easier for small companiesMaking R&D easier for small companies It provides: This guidance outlines how tax relief for Research and Development (R&D) • straightforward definitions and explanations of the schemes works for small and medium-sized enterprises (SMEs). • details of qualifying costs • guidance on how to make a claim under the SME and RDEC schemes • advice on where to find help and further detailed information. This publication provides general guidance on the law, but how the law applies in a particular case is fact-dependent and where there is doubt you should contact HMRC. 3 Research and development tax relief: Making R&D easier for small companiesBackground Specific definitions of R&D can be found at: R&D is a Corporation Tax (CT) tax relief that may reduce In 2000 the government introduced gov.uk/hmrc-internal-manuals/corporate-intangibles- your company’s tax bill if your company is liable for research-and-development-manual/cird81900 a scheme to encourage scientific and CT or, in some circumstances, you may receive a technological innovation within the Further guidance on RDEC can be found at: payable tax credit. This guidance is designed to help gov.uk/hmrc-internal-manuals/corporate-intangibles- you make a claim for tax relief if you are an SME. United Kingdom. research-and-development-manual/cird89705 The Research and Development Expenditure Credit (RDEC) scheme was introduced in the Finance Act 2013 — it enables companies with no CT liability to benefit through a cash payment or a reduction of tax or other duties due. 4 Research and development tax relief: Making R&D easier for small companiesWhat is R&D relief? 5 Research and development tax relief: Making R&D easier for small companiesWhat is R&D relief? R&D relief allows companies that carry out qualifying Features of the RDEC scheme For tax purposes, R&D takes place when R&D related to their trade to claim an extra CT a project seeks to achieve an advance in Companies with no CT liability will benefit from RDEC deduction for certain qualifying expenditure. either through a cash payment or a reduction of tax or overall knowledge or capability in a field The level of relief available depends upon other duties due. The payable credit is limited to the which scheme the company uses. of science or technology. company’s PAYE/NIC liabilities of the staff engaged in qualifying activities in the accounting period. The SME scheme SMEs will be able to claim RDEC if they do subcontracted From 1 April 2015, the relief a company can get has or subsidised research. Companies in groups can increased to 230% on their qualifying R&D costs. surrender the RDEC against another group company’s Loss-making companies can in certain circumstances CT liability. surrender their losses in return for a payable tax credit. Research and Development Expenditure Credit Further information on SMEs can be found on page 23. (RDEC) scheme From 1 April 2015 a taxable credit is available at 11% of qualifying R&D expenditure. For loss making companies the tax credit is fully payable (subject to certain restrictions). 6 Research and development tax relief: Making R&D easier for small companiesIs my company small or large? To find out if a company is an SME for R&D tax relief When accounts are prepared in sterling, convert the purposes we look at: turnover and balance sheet totals to euros, using the exchange rate for the balance sheet date. • staff headcount (less than 500) Sometimes, a company will have to take into account • either turnover (€100m) or balance sheet total its own data, a proportion of a partner enterprise’s data (less than €86m). or the data of a linked enterprise. There’s more about partner and linked enterprises on the next page. If your company has no external investors and isn’t in a group, you only need to count your own company data. 7 Research and development tax relief: Making R&D easier for small companiesDoes my company have linked or partner companies? Linked companies Partner companies If your company has external investors or is in a group, it’s worth looking at If the company is controlled by or controls other If 25% or more of a company is owned by another, companies it is a linked company, for example if it or if the company owns 25% or more of another, it is the detailed guidance. The following is has more than 50% of the shareholders’ or members’ a partner company. a summary of the main rules. voting rights in another company. Certain companies and types of investor are excluded The data of the linked companies should be added from consideration as a partner. There is more about to the data from the company that does the R&D. this in the detailed guidance. Detailed guidance on linked and partner companies can be found at: gov.uk/hmrc-internal-manuals/ corporate-intangibles-research-and-development- manual/cird91000 A proportion of the data of the partner companies should be added to the data from the company that does the R&D. So if the other company controls 30% of the R&D company, add 30% of its data. 8 Research and development tax relief: Making R&D easier for small companiesExample of a company being a linked or A will add 25% of the accounts figures of D. partner company So if D has a turnover of €30m, A will add €7.5m to its totals. Company A is linked to Company B because B has a 60% holding in A. B also has two partner companies: C and D, which own 32% and 25% of B. D A must add 100% of the data of B plus 35% of the owns 25% of A will add 100% of the accounts figures of B. data of C and 25% of the data of D to its own data. B So if B has assests of €10m, A will add €10m to its totals. A B owns 60% of does the A R&D C owns 35% of B A will add 35% of the of the accounts figures of C. So if C has turnover of €100m, A will add €35m to its totals 9 Research and development tax relief: Making R&D easier for small companiesWhich projects qualify? 10 Research and development tax relief: Making R&D easier for small companiesWhich projects qualify? R&D has a specific statutory definition for the Things to consider Work that advances overall knowledge purposes of R&D tax relief which is not the same as or capability in a field of science or • Does my company have a project? the commercial, engineering or accounting definitions. technology, and projects and activities • Am I seeking an advance in a field of science To qualify the company must be carrying out research that help resolve scientific or technological or technology? and development work in the field of science or uncertainties, may qualify for R&D relief. technology. The relief is not just for ‘white coat’ scientific • Does the advance extend the overall knowledge research but also for ‘brown coat’ development work in or capability in the field of science or technology design and engineering that involves overcoming difficult and not just the company’s own state of knowledge technological problems. or capability? This can include creating new processes, products or • Does the project involve an uncertainty that competent services, making appreciable improvements to existing professionals can’t readily resolve and where solutions ones and even using science and technology to duplicate aren’t common knowledge? existing processes, products and services in a new way. But pure product development in itself does not qualify. Judging which projects and activities will qualify for R&D tax relief is usually the area where most people Some examples of qualifying activities include software seek help. Experience has shown that companies development, engineering design, new construction can benefit from HMRC’s early involvement. There is techniques, bio-energy, cleantech, agri-food and life information about our Advance Assurance scheme, and health sciences. There are case studies at the end which helps with these issues, later in this guide. of this guide for these industries. 11 Research and development tax relief: Making R&D easier for small companiesHow to show that your project is R&D within the tax den fi ition 1. What is the scientific or technological advance? 2. What scientific or technological uncertainties When you submit a claim it helps if you were encountered? give details of your project. The questions Concentrate on the science and technology Did you really encounter ‘uncertainty’? below will help you decide if your project Rather than stating the product, process or functionality is within our definition for R&D. If your being developed, consider what scientific or technological Scientific or technological uncertainty exists when advance is being sought. This focuses attention on the knowledge of whether something is scientifically claim clearly sets out how you approach project’s aim for an advance. This is important in judging possible or technologically feasible, or how to achieve these questions, it helps HMRC see that whether or not R&D for tax relief purposes is being it in practice, isn’t readily available or deducible by a your company really is doing R&D. undertaken. competent professional working in the field. Some activities aren’t science Not every problem is an uncertainty Science doesn’t include work in the arts, humanities But uncertainties that can be resolved through and social sciences (including economics). relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. ‘Commercially innovative’ isn’t enough Technical problems that have been overcome in previous projects on similar systems aren’t likely to It’s not enough that a product is commercially be technological uncertainties. innovative. You can’t claim in respect of projects to develop innovative business products or services that Set out what happened don’t incorporate any advance in science or technology. In your claim, you should set out at a high level, in a way that can be understood by someone who’s not an expert, what the uncertainties were and when they started and ended. 12 Research and development tax relief: Making R&D easier for small companies3. How and when were the uncertainties overcome? 4. Why wasn’t the knowledge being sought readily deducible by competent professionals? Describe the methods used to overcome the uncertainties and the investigations and analysis Explain the uncertainty in the context of the known undertaken. This shouldn’t be in great detail, state of the field of research but enough to show it wasn’t straightforward. It might be publicly known that others have tried to Describe the successes and failures and the impact of resolve the uncertainties and failed. Or maybe others these on the overall project. If the uncertainties weren’t have resolved the uncertainties, but precisely how it overcome, explain what happened. was done isn’t in the public domain. In either case a valid technological uncertainty can still exist. Remember that the commercial failure of the product or project does not mean that R&D was not present. What if there’s limited available information about the And if the scientific uncertainties weren’t overcome, state of the field of research? that can still mean that the work to address the uncertainties can be R&D. If there’s little public information available about the project, you’ll need to show that the people leading it are competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience and then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties. Whichever is appropriate, set out the details and have evidence available if needed. 13 Research and development tax relief: Making R&D easier for small companiesThe start and end of a project for R&D tax purposes When a project starts R&D can take place even after production starts It’s important to know when an R&D project starts and ends, because that The project starts when work to resolve the uncertainty If any new problems arise involving scientific or starts. This is when you have identified the technical technological uncertainty after the product has been makes sure your company claims the issues that need to be resolved, and the current state put into production or into use then the R&D process right amount of relief. of knowledge within that field of science or technology may start again. There is a distinction between has not provided a solution to those uncertainties. such problems involving science and technological uncertainties and routine fault fixing or design tweaks. When a project ends It is particularly important that the people doing the A project ends when that uncertainty is resolved or work are involved when considering whether the project the work to resolve it ceases. This is when you have a is R&D for tax purposes as they are the ones who working prototype or material device/product or process understand best the scientific or technological problems ready to be tested or go into production, or if you decide involved. They should focus on what advances the not to take the project forward. project is seeking to achieve and the uncertainties to be faced rather than on the eventual product aspiration, specification or design. 14 Research and development tax relief: Making R&D easier for small companiesPossible commercial project timeline — defining R&D for tax purposes This illustrates the qualifying and non-qualifying activities within a ‘whole life’ project plan. Examples of how this may apply to some of the industry sectors can be found on page 35 onwards. Beginning End Non-Qualifying Qualifies Non-Qualifying Qualifies Non-Qualifying Technological Technological Technological Technological or Scientific or Scientific or Scientific or Scientific Patents Patents Commercial/ Market/ Pre-production Industrial Commercial Uncertainty Uncertainty or other Uncertainty Uncertainty or other scientific feasibility IP protection design upscaling IP protection ascertained resolved or ascertained resolved or application Idea Research sought sought work to resolve work to resolve it stops it stops RESOLUTION of scientific RESOLUTION of scientific or technological uncertainty or technological uncertainty Prototypes Prototypes The parts of a project that require R&D activity to knowledge is codified in a usable form, or when work resolve scientific or technological uncertainties qualify to resolve the uncertainty ceases. for tax relief. The qualifying work starts when work to resolve the uncertainty starts, and ends when the new 15 Research and development tax relief: Making R&D easier for small companiesWhat costs qualify? 16 Research and development tax relief: Making R&D easier for small companiesWhat costs qualify? Direct R&D staff costs Externally provided R&D staff Direct and externally provided staff, subcontracted R&D, consumables, Your company can claim for salaries, wages, class 1 NIC These are the staff costs paid to an external agency for and pension fund contributions for staff directly and staff who are directly and actively engaged in the R&D software, trials, prototyping and actively engaged in the R&D project. project — these are not employees and subcontractors. independent research costs may all Relief is usually given on 65% of the payments made to This covers employees who undertake ‘hands on’ R&D qualify for R&D relief. Capital expenditure the staff provider. Special rules apply if the company and work and the proportion of supervisory and managerial does not qualify under this scheme, staff provider are connected or elect to be connected. time spent specifically directing such employees in those nor does expenditure on the production activities. Further information on externally provided R&D staff can be found at: hmrc.gov.uk/manuals/cirdmanual/ and distribution of goods and services. cird84000.htm Support staff costs, for example administrative or clerical staff, do not qualify, except when they relate to qualifying indirect activities. These can be activities like maintenance, clerical, administrative and security work. A more detailed definition of support staff costs at: hmrc.gov.uk/manuals/cirdmanual/CIRD81900.htm Your company cannot claim for employment-related benefits. 17 Research and development tax relief: Making R&D easier for small companiesSubcontracted R&D Software directly used in the R&D Prototypes SME Scheme Your company may claim for the cost of software that Where a prototype is created to test the R&D being is directly employed in the R&D activity. Where software undertaken, the design, construction and testing costs Your company can generally claim for 65% of is only partly employed in direct R&D, an appropriate will normally be qualifying expenses. the payments made to unconnected parties. apportionment should be made. The subcontracted work may be further subcontracted However, if the prototype is also built with a view to Further information on software directly used in the to any third party. Special rules apply where the parties selling the prototype itself (such as the construction R&D can be found at: are connected or elect to be connected. of a bespoke machine), HMRC considers that to be hmrc.gov.uk/manuals/cirdmanual/cird82500.htm production and outside the R&D scheme, even if R&D RDEC Scheme was undertaken to create the prototype. Clinical trial volunteers R&D expenditure subcontracted to other persons is In that case you need to work out the split between Pharmaceutical companies and research organisations generally not allowable unless it is directly undertaken R&D expenditure and production costs. For example, often make payments to volunteers taking part in clinical by a charity, higher education institute, scientific research the construction costs and materials consumed would trials. These are allowable for relief, but read organisation or health service body — or by an individual not be qualifying expenses, but design, modelling and the guidance first. or a partnership of individuals. testing costs could still qualify. Further information on payments to volunteers taking part in clinical trials can be found at: Further information on SME/RDEC schemes can be found Collaborative working hmrc.gov.uk/manuals/cirdmanual/cird84400.htm at: hmrc.gov.uk/manuals/cirdmanual/cird84250.htm In general, where two companies collaborate on a R&D Contributions to independent research project, each can claim relief on the qualifying costs they Consumable items have incurred. Only large companies may claim R&D relief on Your company can claim for the cost of items that are contributions they make towards funding relevant Where a company and a university or other research directly employed and consumed in qualifying R&D independent R&D. This R&D must be carried out by institute collaborate, only the company can claim relief projects. These include materials and the proportion the recipient and be related to the company’s trade. on the qualifying costs it has incurred. of water, fuel and power consumed in the R&D process. Contributions must be made to a qualifying body — Collaborative arrangements are governed by their a charity, higher education institute, scientific research From 1 April 2015, the costs of materials incorporated contracts and you should seek advice from HMRC organisation or health service body — or to an individual in products that are sold are not eligible for relief. where it’s unclear which company gets the relief. or a partnership of individuals. Further information on consumable items can be found at: Further information on contributions to independent hmrc.gov.uk/manuals/cird82300.htm research can be found at: hmrc.gov.uk/manuals/cirdmanual/cird82200.htm hmrc.gov.uk/manuals/cirdmanual/cird82250.htm 18 Research and development tax relief: Making R&D easier for small companiesWhat costs do not qualify Not all costs qualify, and you cannot receive R&D • The cost of land relief for: • Payments for the use and creation of patents and • The production and distribution of goods and services trademarks, as these are the cost of protecting the completed R&D. This also includes the staff costs • Capital expenditure under either of the R&D relief in relation to the time spent by all staff on the schemes. However, a generous 100% Research and preparation and submission of such applications. Development Allowance may be due on capital assets, However, the Patent Box enables companies to apply such as plant, machinery and buildings used for R&D a 10 per cent rate of Corporation tax to profits earned activity. from their patented inventions after 1 April 2013. Further information on capital assets used for R&D activity can be found at: gov.uk/hmrc-internal- Further information on Patent Box be found at: manuals/capital-allowances-manual/ca60000 gov.uk/guidance/corporation-tax-the-patent-box 19 Research and development tax relief: Making R&D easier for small companiesSubcontracted R&D 20 Research and development tax relief: Making R&D easier for small companies