UK CT - Research and Development Expenditure

What is RDEC?

Research and development expenditure credits:

• additional tax relief on revenue trade expense that can already be deducted from profits for tax purposes

What are the 2 types of R&D schemes, who can be in them and when did they come in?

Began on or after 1 April 2024

1. The all-company regime (“merged”) - all companies

2. the SME regime - if meet the additional criteria then can opt in

When is a company entitled to make an RDEC claim?

If they meet all 3 conditions within an AP:

1. Must carry on a trade within the AP

2. Expenditure must be an allowable trading expense and be qualifying R&D expenditure

   a. in-house R&D

   b. payments for contracted out R&D

   c. activity as a contractor for non-taxable entity (e.g. unions or NHS trust)

3. Company must not be an ineligible company (e.g. charity/university/NHS)

What are the 4 conditions that need to be met for the R&D qualifying expenditure?

1. Expenditure must be attributable to relevant R&D undertaken by the company itself,

2. it relates to staff costs, software/data licenses/cloud computing, externally provided workers and payments to clinical trial subject,

3. the R&D is not contracted out to the company

4. Not attributable to an exempt foreign PE

What is the tax treatment for the provision of external workers from a connected company?

Qualifying expenditure is the lower of the cost of the workers to the supplier or the payment to the supplier

What is the tax treatment for the provision of external workers from a non-connected company?

Qualifying expenditure is capped at 65% of the payment for the workers - this is used in the 20% RDEC calc.

What are the 7 steps for calculating RDEC?

step 1:

• 20% RDEC

Step 2

• Remaining RDEC is capped at “Net value” (Full RDEC * notional CT rate)

• Lower of remaining RDEC and net value is c/f to step 3

• Capped RDEC is offset against CT liability of subsequent period or can be surrendered to the group

Step 3:

• Remaining S2 RDEC is capped at lower of remaining RDEC or the PAYE cap

• £20k + (3*relevant workers expenses)

• £20k to be apportions for short AP

Step 4:

• Max RDEC from S3 is offset against Comp’s CT liabilities for any other AP

Step 5:

• remaining RDEC can be surrendered to group to offset their CT liability in corresponding AP

Step 6:

• remaining RDEC can beoffset against other liabilites to HMRC (VAT/penalties/PAYE)

  Step 7:

  • Remaining RDEC is payable in cash to the company babehhhh

How do you calculate step 1 of RDEC?

1. Identify qualifying expenditure

2. add 20% of it back to total profits

3. Deduct 20% from CT liability

4. If have remaining RDEC then move onto step 2

Outline the R&D compliance:

• All companies must make a claim notification for RDEC claim within the notification period (star of the POA to 6 months after the end of that POA)).

• All claims to be done digitally.

• Must submit additional info to HMRC for an RDEC claim to be valid.

• HMRC has power to use discovery assessment to recover excessive R&D payments made to a company and can remove RDEC claims when amending a return to correct errors.

What conditions must be met to be considered an SME?

Less than 500 employees and either:

• Turnover less than 100m euros or

• Balance sheet not exceeding 86m euros

Apprenticeships and student contracts do not count in the headcount.

For linked enterprises, these amounts need to be combined:

• A linked enterprise has more than 50% of the voting rights in the other

What is an R&D intensive SME?

Invest heavily into R&D (at least 30% of its total expenditure)

What are the conditions for joining the SME regime?

• Be an SME in the AP

• R&D intensive

• Carries on a trade

• Expenditure allowable as trading deduction and qualifying R&D expenditure

• Must be making a trading loss within the period

• Must not be an ineligible company

What relief can be claimed under the SME regime?

An additional trade deduction that is equal to 86% of the qualifying R&D expenditure.

A further relief can be claimed to surrender part of the loss to HMRC in return for a tax credit for 14.% and is the lower of

• unrelieved trading loss

• 186% of the qualifying R&D expenditure

What are the SME R&D rules for pre-trade expenditure?

A company can claim SME relief for an AP before they start to trade if they meet all the normal conditions except for the trading and loss making ones.

Must claim the relief within 2 years from the end of the AP.

If eligible for the relief, a company is treated as having made a trade loss equal to (186% * RDQE) and loss can be group relived / c/f against total profits or surrendered as a tax credit.