Posted by admin - November 11, 2015 10:26 am
Research & Development for Small Companies
Research and Development… sounds complicated?
It really isn’t! As a small company, you could be missing out on a Corporation Tax relief which could reduce your corporation tax liability or even generate a repayable tax credit.
From 1 April 2015 the relief increased to 230% from 225% for small companies.
R&D is defined for tax purposes as ‘a project seeking to achieve an advance in science or technology’. Any activities that directly contribute to achieving this advance are classified as R&D as well as some qualifying indirect activities.
An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability).
This can be viewed basically as:
- Extending overall knowledge or capability in a field of science or technology or,
- Creating a new process which increases overall knowledge or capability or,
- Making an appreciable improvement through scientific or technological changes will qualify as R&D.
For any company, identifying whether there is an advance in science or technology is the hard part. The easy part is identifying the costs associated with that advance.
The benefits can certainly outweigh the administration burden
As an example, a company with a 31 December 2014 year end has adjusted trading profits of £30,000. They have qualifying R&D expenditure of £20,000 which has already been included in the profit and loss account.
When preparing the tax computation, additional relief of £25,000, (125% of £20,000) would be entered into the tax computation, reducing the profits by £25,000. Tax would be paid on just £5,000 instead of £30,000. With the corporation tax rate currently at 20% the tax liability would be £1,000 instead of £6,000 – saving £5,000!
For further information on Research and Development and the relief available, contact your local MFW representative.
