Research and development relief in a nutshell
Expenditure on research and development is actively encouraged through the tax system as specific tax reliefs are offered for such expenditure. Companies and other trading businesses are able to claim 100% capital allowances (for capital expenditure on R&D). If the expenditure is revenue in nature, a 100% revenue deduction is available in the normal manner.
In addition, and for companies only, enhanced R&D reliefs are also available. The amount of relief differs depending on whether the company is a small or medium sized enterprise (SME) or a large company.
For an SMEs, an enhanced deduction is available for qualifying expenditure. Where the company has losses this can be surrendered for a tax credit.
Where the R&D is carried out by a large company (and in some circumstances an SME) relief is available as a taxable credit calculated as a percentage of the qualifying expenditure.
What is an SME?
A company is an SME if it has less than 500 staff and turnover not exceeding €100m, or a balance sheet total not exceeding €86m. Where a company exceeds these thresholds it is a large company.
How much relief can be claimed?
The SME enhanced R&D relief is an additional 130% deduction of eligible expenditure. This equates to a total deduction of 230% of that expenditure. Alternatively, if the SME is loss making, it may instead claim an R&D tax credit equal to 14.5% of its unrelieved trading loss, or 230% of the related qualifying R&D expenditure if lower. Any pre-trading R&D expenditure is treated as incurred on the first day of trading and available for relief in the normal manner. The effect of this rule is to allow companies that are carrying out R&D, but which are loss making, to receive the benefit of R&D tax reliefs earlier than would otherwise be the case.
The large company enhanced R&D relief is less generous. Companies can only claim a taxable R&D expenditure credit (RDEC). The credit is calculated directly as 13% of qualifying R&D expenditure for the period.
Which R&D relief applies – SME or large company?
The SME enhanced R&D relief can only be claimed on qualifying expenditure incurred by a company that falls within the relevant threshold limits (less than 500 staff and turnover not exceeding €100m, or a balance sheet total not exceeding €86m). However, where expenditure is subsidised then even if a company falls withing the definition of an SME it cannot claim SME R&D relief. Instead it may be able to claim the large company R&D expenditure credit (RDEC).
The large company R&D expenditure credit (RDEC) can be claimed on qualifying expenditure incurred by a company that is not an SME. It can also be claimed by a company that is an SME if the qualifying expenditure is subsidised (by for example a government grant).
There is a period of grace in that if a company grows and becomes large or alternatively becomes an SME after being a large company there is no change in status from an SME to a large company, or vice versa, unless the position is repeated for a second consecutive year.
What about sub-contracted work?
If R&D has been subcontracted out by a large company to an SME, the large company cannot claim R&D tax relief. The SME, however, may be able to claim under the RDEC regime.
If R&D has been subcontracted to a large company or an SME only the RDEC relief can be claimed.
What expenditure qualifies for the enhanced R&D relief?
The definition of research and expenditure is very broad, and the R&D itself doesn’t have to have been successful to qualify.
Expenditure will qualify for relief if one or more of the following costs have been incurred on ‘activities that would be treated as R&D in accordance with generally accepted accounting practice’:
- staff, including wages, pension contributions, NIC
- subcontractors and freelances
- software items
- consumable items such as water, fuel or power that are used up by the R&D process and are no longer in their original form
- payments to the subjects of clinical trials
- for large companies only: contributions to independent research
How is the relief claimed?
The enhanced R&D reliefs must be claimed in the company tax returns. There is no automatic relief.