The SME Scheme
A SME can claim R&D tax relief on expenditures incurred in carrying out R&D activites. In order to qualify for this relief the SME must be entitled to ownership rights in any resulting Intellectual Property. Relief is available for expenditures for R&D either performed directly by the SME or on its behalf. The expenditures must not be capital in nature, and must have been allowable as a deduction in computing the profit of the period, and must relate to the trade undertaken by the SME. The types of R&D expenditures that qualify for relief vary depending on the time period they were incurred, in that the legilslation has changed a number of times since its introduction.
SME access to relief can be restricted where a company receives outside funding for an R&D project. Any Notified State Aid received for a R&D project at any time will exclude all expenditure on that project from SME relief. If any subsidies or grants are received (for a R&D project) that are not Notified State Aids then only expenditure incurred by the company in excess of that subsidy or grant will qualify for the SME relief. A SME must not have been contracted to carry out the R&D. If a SME fails to qualify for the SME R&D Tax Credit relief as a result of a funding or because it was contracted to do the work only, then it may be able to claim under the Large Company Scheme.
A SME can elect to treat its pre-trading R&D expenditure as incurred in the accounting period in which it arose as opposed to the day trading begins. The election applies to all the companies R&D expenditure and it must be made in writing to Inland Revenue within 2 years of the end of the accounting period to which it relates.
Enhanced deduction
An eligible SME may claim to deduct 175% of that qualifying R&D expenditures. So, when it computes its profits or losses for tax purposes it may deduct an extra 75% of those qualifying expenditures. Any losses that arise can be utilised in the same ways as any other trading losses including group relief. Consortium relief is restricted to those consortium members who are themselves SMEs.
Refundable Credit
A SME that does not earn a profit, and therefore is not able to obtain immediate benefit of the 175% enhanced deduction, can surrender its surrenderable loss in return for a cash refund. The surrenderable loss for an accounting period is the lower of 175% of the qualifying R&D expenditure and the unrelieved trading loss for that accounting period. The unrelieved trading loss is the companies trading loss less the aggregate of setting the loss against profits of the same accounting period (ICTA88/S393A (1)(a)), any other relief obtained in respect of the loss and any amount surrendered to group or consortium members.
The cash refund received is not treated as taxable income to the company; however the enhanced relief must be surrendered in order to receive this payment.
The refund is made at a rate of up to 24.5% of eligible R&D expenditures incurred. More specifically, the payable tax credit that a company is entitled to for an accounting period is 14% of the surrenderable loss for that period. The time limit for making a SME refundable credit claim is 2 years from the end of the accounting period to which the claim relates. The cash refund is limited to the amount of the company’s PAYE and NIC liabilities of its own employees paid for payment periods ending in that accounting period. A payment period is a period that ends on the 5th of the month and for which the company is liabile to account for income tax and NIC to Inland Revenue.
There are instances where Inland Revenue will not pay the refundable credit. These include situations where the company has outstanding CT liabilities, where there is an enquiry by Inland Revenue into the company’s return for the accounting period for which the R&D tax relief is claimed, or where the company has outstanding PAYE or Class I NIC liabilities for payment periods ending in the accounting period.
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