Contractor’s Question: I am considering taking on an employee to develop new products for my company. Would this qualify for research and development tax incentives?
Expert’s Answer: The key to claiming R&D tax relief is to meet the technological criteria, but there are financial criteria as well. The relief is given against corporation tax, so it’s available only to companies.
It is granted for spending on a project that “seeks to achieve an advance in overall knowledge or capability through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability”.
The HM Revenue & Customs website expands on this and poses four key questions that you must be able to answer:
(a) What is the scientific or technological advance?
(b) What were the scientific or technological uncertainties involved in the project?
(c) How and when were the uncertainties actually overcome?
(d) Why was the knowledge being sought not readily deducible by a competent professional?
R&D relief under the SME scheme can be claimed only if your spending is at least £10,000 a year on qualifying R&D costs. The SME scheme increases tax relief by 75% on qualifying spending. This can either reduce the corporation tax you pay or be cashed in as a tax credit, repayable at 14%. Qualifying expenditure includes the cost of employing staff who are carrying out R&D, so it will cover the expense of your new employee.
There are special rules about certain other costs, which you will need to look at carefully to get a true idea of the amount you may be able to claim. Claims are made in the company’s corporation tax return. HMRC has a specialist R&D unit to review claims, and there is evidence that they are being scrutinised more closely than in the early years of the scheme.
The expert was Jon Sutcliffe, partner at chartered accountancy firm Kingston Smith LLP.