The current Research and Development (R&D) regime in the UK has become increasingly beneficial in recent years with rates of relief increasing combined with the removal of some of the barriers to making claims. At a time when planning opportunities at a UK level are diminishing, government endorsed relief such as this will become increasingly popular, particularly as it is part of the ongoing UK growth policy and therefore look set to stay.
The tax relief operates by encouraging companies to invest in R&D activities by providing additional relief on qualifying R&D costs. Relief is available to all businesses both large and small, but it is the relief afforded to small and medium sized enterprises (SMEs) that offers the largest savings, currently a tax deduction of up to 225% may be claimed.
For some taxpayers this could be a major relief, especially hedge fund managers, many of whom develop their own bespoke trading systems and technologies. The key criteria for any project to qualify is that it must seek to achieve “an advance in science or technology” through the resolution of “scientific or technological uncertainty.” For any development project that a business embarks upon where there is an element of uncertainty there is a possibility the work may be eligible for R&D.
Technological uncertainty is an interesting concept and is where most investment managers may qualify. Where taxpayers managers are trying to combine different technologies to resolve an uncertainty, this may well qualify as R&D. Additionally the design and development of new trading algorithms may also qualify.
In practice tax specialists, be they advisers or at HMRC, are typically only ever going to understand a fraction of the real detail in an R&D project as so much relies on whether the individuals undertaking the work believe their activities qualify.
For SMEs the 225% relief is given as enhanced deduction within the tax computation. By way of example, if a company has spent £100,000 on a R&D project then they will be entitled to a £225,000 deduction in their tax computation. Loss making businesses can either look to carry the additional loss created by the relief forwards, back a year and in some cases sideways through group loss relief claim. Alternatively they can seek to surrender the loss and receive a direct cash payment, currently 10% of the enhanced expenditure i.e. the £225,000 above would result in a cash payment of £25,000 from HMRC, a particularly useful addition to the cash flow of a start up business in the early years, albeit lower than the value of the loss if used to offset profits.