Get tax relief for hiring R&D staff

TL writes: I am considering taking on a new employee. A part of his remit will be the development of new products. Before we take the plunge, I am reviewing the potential costs involved. I was wondering whether the work might qualify for HM Revenue & Customs’ (HMRC) research and development (R&D) tax incentives. What are the criteria we would need to meet to get the incentives?

The key obstacle to claiming R&D tax relief is usually the technological aspects, but there are financial hurdles as well, writes Jon Sutcliffe, partner at Kingston Smith LLP. The relief is against corporation tax, so is only available to companies. Relief is available for expenditure on a project which “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 HMRC website expands on this further and poses four key questions that you need to be able to answer:

1. What is the scientific or technological advance?
2. What were the scientific or technological uncertainties involved in the project?
3. How and when were the uncertainties actually overcome?
4. Why was the knowledge being sought not readily deducible by a competent professional?
This is where a number of claims do not succeed, and you can see further detail at:

www.hmrc.gov.uk/ct/forms-rates/claims/randd.htm

R&D relief under the SME scheme can only be claimed where your qualifying expenditure is incurred at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. The SME scheme increases tax relief by 75% on qualifying expenditure. This can either reduce the corporation tax you are paying or be cashed in as a tax credit, repayable at 14%. Qualifying expenditure includes employing staff directly who are actively engaged in carrying out R&D, so will cover costs spent on 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 claims are being scrutinised more closely now than in the early years of the scheme.