Get on the Right Track for Tax Credits
Despite the railways having been around in the UK for nearly 200 years, they remain a key part of the national transport infrastructure.
The railway today is a far departure from the days of Brunel and the Stephensons, but the level of innovation and development that is evident in the industry would surely have captured the interest and admiration of those early pioneers.
The key challenges of providing a more reliable, safer, cleaner, energy efficient railway means that those businesses involved in supplying the sector are heavily involved in developing new products, services, and methodologies.
This level of innovation and development inevitably involves substantial investment of time and funds. HMRC’s Research and Development Tax Credit scheme is a key tool in the tax system that encourages businesses to invest in this area.
What are Research and Development (R&D) tax credits?
R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation.
They work by reducing a company’s tax bill or by the payment of a credit, linked to the amount of the company’s qualifying R&D expenditure.
A company can only claim R&D tax credits if it is liable for Corporation Tax.
There are two schemes for claiming relief:
(1) the Small or Medium-sized Enterprise (SME) scheme;
(2) the Research and Development Expenditure Credits (RDEC) scheme
The RDEC scheme (also known as ‘Above-the-Line’) was introduced in April 2013 for large companies.
A company with no tax liability can now receive a cash payment from HMRC via the RDEC scheme.
What tax reliefs is available to SME companies?
A company can claim an enhanced deduction against its taxable profits for expenditure which is qualifying R&D expenditure. The amount of the enhancement has increased over the years. The rate was 125% for expenditure incurred before 31 March 2015 and has increased to 130% from 1 April 2015. This amount is in addition to the actual expenditure (i.e. a 230% total deduction from 1 April 2015). The relief can generate significant tax savings and tax repayments.
If the R&D claim creates a tax loss, then the company may be able to surrender the loss for a cash repayment. This is currently 14.5% of qualifying R&D expenditure. A surrendered loss could therefore give a repayment of up to 33.35% of the expenditure.
Newly created companies can also benefit. Where the company incurs qualifying R&D expenditure before it starts to trade, it can elect to treat 230% of that expenditure as a trading loss for that pre-trading period.
The pre-trading loss created by the R&D relief can then be surrendered, as above, which could provide much needed cash flow for new companies.
R&D capital expenditure may be eligible for research and development capital allowances which provide a 100% deduction for tax purposes.
What about the RDEC scheme?
R&D relief may not be available under the SME scheme if the R&D project has had the benefit of a grant or subsidy. There may, however, be an alternative claim available to the company. This is known as the Research and Development Expenditure Credit scheme (RDEC).
RDEC allows the SME to claim a taxable credit of 12% of the eligible R&D expenditure. As this amount is taxable it is known as an ‘above the line’ credit.
The credit received is deducted from your company’s corporation tax bill, or if there is no tax payable, the net amount can be claimed as cash.
The RDEC scheme is also available to an SME for subcontracted R&D carried out on behalf of a large company.
What type of project qualifies?
R&D relief can only be claimed by companies that have incurred expenditure on qualifying R&D projects that are relevant to the company’s trade.
Broadly a project should address an area of scientific or technological uncertainty and be innovative. The innovation needs to seek an improvement in the overall knowledge in the relevant field of research, not just an advancement for the company.
Qualifying projects in the rail sector could include those which:
- increase the service life of track parts or reduce the amount of wear and tear they are subject to;
- increase the visibility of signalling equipment in challenging lighting conditions
- increase the service intervals for rolling stock and reduce in service failures
An important point to appreciate is that the activity does not have to create something completely new from scratch. It could include:
- developing a product that exists but where there is some technological uncertainty which can be improved
- making an improvement to a product or process, e.g. exploring new cost effective materials, which could allow a product to perform better.
How we can help
We have extensive experience of making successful R&D tax relief claims and are currently working on claims in this sector. If you would like to discuss whether your company may be eligible to claim R&D relief, please get in touch with us.