Corporation tax - Chapter 17 - 18 - R&D

Question 1

What are the 3 conditions to claim R&D relief through the ‘All-Company Regime’?

Answer 1

1. Must be a trading company;
2. Expenditure must be allowable as trading deduction and be qualifying R&D expenditure (RDQE);
3. The company must not be an ineligable company (i.e. Charity, University or the NHS)

Note: The company must make a claim to obtain RDEC.

Question 2

What is RDQE under in-house R&D?

Answer 2

1. Staff costs;
2. Software, data licences, cloud computing services or consumable items;
3. Externally provided workers;
4. Relevant payments to subjects of clinical trials

Question 3

What is allowable for contracted out R&D?

Answer 3

If paying a connected person the whole amount

If paying an unconnected person then 65% of the expenditure

Question 4

Explain step 1 of RDEC calculation?

Answer 4

Step 1 is to first reduce the company’s current year tax liability

To do this we must:
- Add back RDEC @ 20% of RDQE
- Calulate tax liability @ 25%
- Remove RDEC previously added back

Example - If a company spends £100k on qualifying exp in the year:
- RDEC = 20% x £100k = £20k
- Additonal tax on RDEC = 25% x £20k = £5k
- Offset RDEC against total liability to give total saving = £20k - £5k = £15k

Question 5

Explain step 2 of RDEC calculation?

Answer 5

If any RDEC remains after step 1 we calculate a notional tax deduction on this amount which can be group relieved or carried forward.

The formula is as follows:
RDEC remaining after step 1 = X
Less: Notional tax deduction (Initial amount of RDEC - Notional tax charge) = (X)

Gives RDEC remaining after step 2

Question 6

Explain step 3 of RDEC calculation?

Answer 6

RDEC capped at £20k + (3 x relevant PAYE and NICs)

Includes total PAYE and NICs not just R&D staff.

Question 7

Explain step 4 - 7 of RDEC calculation?

Answer 7

Step 4 - Set off remaining RDEC against CT liabilities outstanding from other periods.

Step 5 - Company may choose to group relieve RDEC

Step 6 - Remaining balance used to settle any other amounts owed to HMRC

Step 7 - The balance is payable by HMRC to the company as a repayment

Question 8

What are the 6 conditions to claim R&D relief through the ‘SME Regime’?

Answer 8

1. The company must be an SME;
2. The company must meet the R&D intensity condition in the AP;
3. Must be a trading company;
4. Expenditure must be allowable as trading deduction and be qualifying R&D expenditure (RDQE);
5. Company must make a trading loss in the period;
6. The company must not be an ineligable company (i.e. Charity, University or the NHS)

Note: The company must make a claim to obtain RDEC.

Question 9

What is the ‘intensity condition’?

Answer 9

The company RDQE amounts to at least 30% of the total relevant expenditure for the period

Question 10

How do you calculate tax credit for SME R&D?

Answer 10

First calculate surrenderable loss which is the lower of:
- The trading loss; and
- 186% of the RDQE.

The tax credit is then given by taking lower of:
- 14.5% x surrendable loss
- The PAYE/NIC Cap (£20k + (3 x PAYE/NICs))