The current Research and Development 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 looks set to stay.
The tax relief operates by encouraging companies to invest in Research and Development activities by providing additional relief on qualifying Research and Development 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 230% 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 Research and Development.
Technological uncertainty is an interesting concept and is where some investment managers may qualify. Where managers are trying to combine different technologies to resolve an uncertainty, this may qualify as Research and Development. Additionally, the design and development of new trading algorithms may also qualify.
Costs for which relief can be claimed include; staff costs, costs of externally provided workers, consumable items, utility costs, and certain software costs.
For SMEs the 230% relief is given as enhanced deduction within the tax computation. By way of example, if a company has spent £100,000 on a Research and Development project then they will be entitled to a £230,000 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 a group loss relief claim. Alternatively, they can seek to surrender the loss and receive a direct cash payment, currently 14.5% of the enhanced expenditure. In the case of the £100,000 example above, this would result in a cash payment of £14,500 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.
If you believe that any research and development undertaken in your company could benefit from Research and Development tax relief, please contact us.