While tax policy is primarily aimed at raising money for the public purse, it also often has a secondary purpose of dangling a carrot (or waving a stick) in support of other government initiatives. A classic example is high tariffs on tobacco being used as a deterrent against smoking in line with public health policy.
Corporation Tax is another notable area where the government often seeks to wield its influence. This usually takes the form of offering tax breaks and other incentives to encourage companies to spend in targeted areas and keep money moving throughout the economy.
In the wake of the COVID-19 pandemic, we saw the example of the so-called ‘super-deduction’ capital allowance, which offered a 25p in the £1 tax cut for investments in plant and machinery. The aim was to avoid the snowball effect of hard-hit companies shelving their investment plans and so spreading malaise throughout supply chains.
Another area where the government has long offered purposeful incentives in the form of Corporation Tax relief is research and development. R&D relief is intended to make investments in innovative science and technology projects more attractive by reducing tax liabilities. This is how it works.
R&D Tax Relief explained
R&D tax relief comes in two forms, one for SMEs and one for larger companies. The one for larger companies is known as R&D Expenditure Credit (RDEC) and can also be claimed by smaller companies sub-contracted to do R&D work by a larger company.
Under the SME scheme, businesses are able to deduct a further 86% of the costs of qualifying projects from their taxable profits. This is on top of the normal 100% deduction businesses can make from profits for all permitted expenditure. So in other words, for every £1 they spend on qualifying R&D projects, SMEs can reduce their taxable profits by £1.86.
If an SME makes a loss after investing in R&D, they can claim back credits at 10% of the amount spent.
Under the RDEC scheme, firms can claim back 20% of the value of their R&D investment as a tax credit.
Under both schemes, there is a requirement for any business seeking to claim R&D tax relief to demonstrate how their project meets certain qualifying criteria. These are:
- Your project must have made a demonstrable advance in the field that can be applied generally, not just as a benefit to your business.
- You have to have undertaken the project in response to a known scientific or technological uncertainty in the field. An uncertainty is defined as expert opinion being unsure whether something is technically possible until you come up with a solution that demonstrates it is.
- You are required to explain the process you went through to resolve the uncertainty, demonstrating the need for research, testing and analysis.
- Likewise, you also need to be able to demonstrate how and why your project succeeded where others have failed.
As well as relating to qualifying projects, claims for R&D tax relief can be made against qualifying costs only. For example, you cannot claim against the cost of applying for patents or trademarks, or for any capital expenditure made in pursuing the project. These must be subtracted from your total expenses when making a claim.