Tax relief of 175% available on R&D

CT writes: I own a software company which I set up five years ago to provide solutions for property marketing. The company has grown steadily and now has around 60 employees. We have been profitable for the last two years, averaging £1.5m a year, and expect another profitable year ahead.

We recently identified a gap in the market and after some initial research we think we can develop some software solutions to plug it, creating something that currently does not exist for our clients. We will need to invest a significant amount in researching and developing the new software to get it to a functional level before we can market it. Most of the work will be carried out internally using our in-house technical experts, but with some external help in a particular area where we don’t have the necessary technical expertise. Are there any corporation tax reliefs available to us in respect of the investment we are making to develop this new software?

SMEs can get enhanced corporation tax deductions of up to 175% where qualifying research and development (R&D) is undertaken, writes Paul Spindler. There is however a minimum spend requirement of £10,000.

The main thing you need to establish is whether the R&D your company is involved in will qualify. R&D tax relief is only available if it results in a significant advance in science or technology. Provided the new software you are developing satisfies this condition, your company will be eligible to claim R&D tax relief.

The size of your company will determine whether you are eligible for the SME relief at 175% or at the large companies’ relief of 130%. As your company has fewer than 500 employees and a turnover of less than Eur100m, it can claim at the SME rate of 175%.

The R&D relief is only available on expenditure incurred on staff, software used, payments of clinical trials, consumable or transformable materials and externally provided workers, although only 60% of the costs for externally provided workers will qualify. You should also be aware that there may be complications where the R&D has been sub-contracted to a third party.

The generous relief available gives the company a further 75% deduction of the eligible expenditure. Based on your profits, your company is likely to be paying corporation tax at 28%, in which case every £1 you spend on qualifying R&D will save 49p in corporation tax.

For loss-making companies the SME scheme allows the tax loss to be surrendered for a tax credit cash repayment. The tax credit is given at 14% of the loss surrendered but only up to a maximum of the company’s PAYE liability for the year.