Tax Relief

Analysis and Improvement Tax Breaks: Is It Too Good To Be True?

QUESTION: I am regularly approached by R&D firms to say that my company should file an R&D tax application to reduce our corporate income tax. What are the eligibility requirements for claiming a claim and how much CT could we save?

ANSWER: Research and development (R&D) tax breaks may sound too good to be true, but they were introduced to incentivize innovation in all sectors in order to make UK companies competitive on a global scale.

Before making a claim, it is important to ensure that the company’s activities conform to the HMRC definition of R&D. There is a common misconception about what R&D is related to obtaining tax breaks, qualified projects must aim to make progress across the board, not just for your business.

This means that advancement cannot just be an existing technology that was first used in your company. R&D must be work that aims to “break new ground”. This could, for example, be the creation or development of new substances, materials, designs, processes, technologies or knowledge. The work has to be “innovative”, periodic changes to existing products or processes, even if these could represent a certain improvement, are unlikely.

A key characteristic of a qualifying R&D project is the uncertainty at the beginning of the project as to whether you will be able to achieve the desired result. You should research or develop something that is not known to be scientifically or technically feasible. Qualifying R&D projects usually require a considerable amount of time to carry out the R&D, ie any uncertainties cannot be easily deduced by a competent specialist.

The R&D tax breaks enable companies to claim additional tax savings on the qualifying costs they incur. How much CT can be saved depends on which of the two types of R&D claims are made; the SME or RDEC scheme. The scheme your company can take advantage of depends on the size of your company and on whether the projects have received state aid. Each scheme works slightly differently, but can be summarized as follows:

• An SME Entitlement results in a deduction of 230 percent from taxable profit, a tax saving of £ 437 for every qualifying expense of £ 1,000.

• An RDEC entitlement results in a 13 percent taxable tax credit on the tax liability, a tax saving of £ 105 for each qualifying expense of £ 1,000.

The above shows that the SME scheme is more generous, but it is only available to projects that are not subsidized by state aid and companies that meet the limits for small and medium-sized enterprises, i.e. have fewer than 500 employees and either a turnover of less than € 100 million or a balance sheet total of less than € 86 million.

The right to tax breaks for research and development is more through qualifying activities than through a specific industry or sector. In reality, successful claims have been made by a variety of industries including digital, manufacturing, architecture, engineering, pharmaceutical, digital, food, ICT, construction, and renewable energy to name a few. Typical goals of R&D projects are to increase efficiency, reduce waste, reduce environmental impact, improve performance, etc.

Specific guidelines should be followed to ensure that your projects qualify as R&D and that you are capturing any qualifying costs in order to maximize the tax break or cash refund related to your entitlement.

:: KellyAnne Murtagh (k.murtagh@pkffpm.com) is Senior Manager at PKF-FPM (www.pkffpm.com). The advice in this column relates specifically to the facts surrounding the question asked. Neither the Irish News nor any of its contributors accept liability for any loss, direct or indirect, arising out of reliance on responses.

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