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R&D tax relief allows companies to claim additional tax savings on the research costs they incur. The enhanced relief reduces a company’s tax bill or provides the company with cash, if the company is loss making.

R&D tax credits were introduced in 2000 for small and medium-sized companies (SME’s). An SME is a company that has fewer than 500 employees and either a turnover of less than €100m or a balance sheet of less than €86m.

When you are considering these limits, you may need to include any company that has a shareholding of 25 per cent in your company and any company your company holds a 25 per cent share of.

During the last 10 years, the R&D tax credits available to UK companies are estimated to have supported over £50bn of R&D activity. SME’s are now permitted to claim an additional 125% tax deduction for qualifying R&D expenditure. This means that an SME paying tax at the small company tax rate will enjoy a tax saving of 45p for every pound spent on R&D, from April 2012.

Alternatively, if the company is loss making, then the losses attributable to the R&D costs can be surrendered for a cash refund from HMRC. Therefore, if your company spends, say, £100,000 on qualifying research and development in 2012, it can claim a tax deduction of £225,000 against profits in its 2012 tax computation which is a tax saving of £25,000.

However, many companies miss out on claiming the full R&D relief because they have received an R&D grant, as it is often not possible to claim both R&D tax relief at 225% and an R&D grant on the same project.

Before making a grant claim, it is therefore very important that you review the impact the receipt of a grant might have on your company’s R&D claim. It is sometimes more beneficial to forfeit a grant and benefit from enhanced R&D tax relief.

On other occasions, however, it is better to claim the grant if the cash-flow benefit of the grant exceeds the R&D tax relief forfeited. If a grant has been awarded, which is ‘notified state aid’, none of the R&D costs will qualify for 225% tax relief of the grant is claimed.

However, the company may still be able to claim relief for the project at a tax relief rate of 130%. If a grant has been awarded which is not ‘notified state aid’ any grant received should be deducted from the qualifying R&D expenditure and relief at 225% claimed on the net cost.

The costs excluded from the 225% relief in this scenario may however qualify for 130% tax relief.

This is a very specialist area and the rules are complex. Specific guidance should therefore be taken to ensure that you benefit from the maximum tax relief or cash repayment in respect of your R&D costs. A detailed review should be carried out before any grant claims are submitted.

Neither Christian Douglass LLP nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on articles.


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