ATXP6 UK
Syllabus A4. Corporation Tax A4c. Taxable total profits

A4ci. Research and development expenditure

Syllabus A4ci)

Identify qualifying research and development expenditure, both capital and revenue, and determine the reliefs available by reference to the size of the individual company/group

Research and development expenditure

In order to encourage more spending on research and development expenditure

additional tax reliefs are given for qualifying research and development expenditure incurred by companies. 

There are separate schemes for Small&Medium companies and Large companies.

  • The exam question will tell you what size the company is.

Qualifying allowable revenue research expenditure includes:

  • Materials

  • Staff costs (salary + Class 1 secondary national insurance)

  • Computer software

Scheme for SME:

  1. If the company spends money on qualifying R&D, they get enhanced relief which means that they can deduct an additional 130% of qualifying expenditure for tax purposes.

  2. If the deduction creates a trading loss, it may claim a cash repayment from HMRC this is called a R&D tax credit which is 14.5% of the surrendered loss.

  3. If this treatment is taken, then the surrendered loss cannot be carried forward for future relief.

Illustration

K plc. Is a profitable manufacturing company. 

It is a small enterprise for the purposes of R&D. 

The company has recently decided to investigate the market for a new type of equipment and has spent the following amounts in the year ended 31/12/2018:

Market research £8,000
Staff directly involved in researching the project £20,000
Administrative support for the R&D department £5,000
Heat and light in the R&D department £9,000
New software £4,000
An agency for temporary R&D staff £10,000

  • What tax relief is available in respect of this expenditure?

Solution:

Allowable expenses that qualify for the enhanced tax relief:

Staff £20,000
Heat and light £9,000
Software £4,000
Agency staff £10,000
Total £43,000

100%+130% = 230% * £43,000 = £98,900 enhanced relief

Note:

Already charged £43,000 
Additional to be charged (£98,900 - £43,000) = £55,900

Scheme for large companies:

Large companies cannot claim an additional deduction, instead they increase their taxable income by 12% of the qualifying expenditure and then claim an 12% tax credit against their C.T. liability.

This is called 'above the line'.

Calculation of the 12% tax credit:

12% of the qualifying R&D expenditure is:

  • Included in the taxable income in TTP and taxed at 19% and

  • then the whole 12% is deducted from the C.T. liability

For example, if the qualifying R&D expenditure is £110,000 then:

Increase TTP by £110,000 * 12% and then tax at 19% = £2,508 and,
Then decrease C.T. liability by (12%*£110,000) £13,200 
this will have a net saving of £10,692

Operation of the scheme

  • In general the 12% tax credit is not received by the company but is deducted from their corporation tax liability for the period concerned.

  • If the amount of the 12% tax credit exceeds the company’s tax liability for the period, the excess is paid directly to the company by HMRC.  

    The repayment is restricted to the company’s PAYE and NIC liability in respect of wages bills included in qualifying R&D expenditure.

  • The amount of the 12% tax credit must be added to the company’s taxable total profits and included as part of their income.

Illustration

C plc. Is a large company for the purposes of R&D expenditure. 

In the year ended 31 March 2019 they have spent £60,000 on qualifying R&D expenditure.

  • What tax relief is available?

Solution

Increase in C.T. Liability:

12% * £60, 000 * 19% = (£1,368)

Decrease in C.T. Liability:

12% * £60, 000 = £7,200

Net saving: £5,832