Research and Development (R&D) tax planning

Research and Development tax relief is one of the most valuable reliefs around to companies who are under the corporation tax system. Many businesses do not realise they can benefit from this valuable relief and think it is all to do with laboratories and white coats.

The exact definition of R&D from HMRC is ‘an advancement in science or technology’.

An advancement in science or technology covers a vast array of things. Say for example you make bricks. The current process takes 2 hours to make 100 bricks and they use £100 of material and £100 of labour time. You manage to develop a new process through trial and error that means that you can now make 150 bricks in 2 hours using just £80 of material and £80 of labour – You have made and advancement in science and technology and the costs sunk into developing the new procedure qualify for R&D relief.

The relief can be given in several ways depending on your situation. For many smaller companies, the relief for qualifying expenditure could be as much as 230% on which you could either save corporation tax at 19% or for loss making companies can be surrendered for a 13% percent cash payment

Using the example above if you spent £25,000 on staff costs and materials working on improving your brick making process this could save you £10,925 in tax. You will get the initial deduction of £25,000 as you do any tax-deductible expense but then because it is R&D qualifying expenditure you will get an additional deduction before the tax is calculated of £32,500.  If you are loss making it could result in a cash inflow of over £7,000.

If you have never discussed R&D with anyone and think you may have undertaken projects which may qualify then please drop us a line and we will be happy to discuss it with you.

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