The R&D Tax Credit Program was introduced to encourage UK companies to perform R&D and to promote investment in innovation. The program allows companies to claim enhanced tax relief for various qualifying expenditures that are not capital in nature. Only companiescorporate partnerships can claim incentives under this initiative. In order to qualify, a company must spend at least £10,000 on qualifying R&D revenue expenditures that are relevant to its trade over a twelve month accounting period. The qualifying R&D expenditures subject to the £10,000 deminimus requirement must be allowable as deductions during the accounting period. There is no requirement under this program that the R&D work be performed in the UK.

The program offers two distinct relief schemes, one for small or medium sized companies (SMEs) and one for large companies. There is also a separate Vaccine Research Relief (VRR) Program.

SME Scheme

A SME can deduct 150% of expenditures incurred in carrying on R&D. In order to claim the enhanced deduction the relevant R&D must be undertaken directly by the company or on its behalf. A SME that does not earn a profit, and therefore is not able to obtain immediate benefit of the 150% deduction, can surrender its “surrenderable loss” in return for a cash refund. The refund is made at a rate of up to 24% of eligible R&D expenditures incurred. The cash refund (payable R&D tax credit) is limited to the amount of the company’s PAYE and NIC liabilities paid for payment periods ending in the relevant accounting period.

Certain SMEs are restricted from claiming this relief. In order to qualify for these incentives the SME must be entitled to ownership rights in the resulting intellectual property. Any funding of an R&D project by another person or state reduces or eliminates the amount eligible for these incentives.

A SME is a company with fewer than 250 employees and either has an annual turnover not exceeding EUR 40 million or a balance sheet total (total fixed and current assets, not net assets) not exceeding EUR 27 million. A SME cannot be a member of a large group.

A new SME definition took effect on 1 January, 2005 and applies to companies with years ending after that date. A SME is defined under this recommendation to be a company with fewer than 250 employees and either has an annual turnover not exceeding EUR 50 million or a balance sheet total (total fixed and current assets, not net assets) of less than EUR 43 million.

Where the claimant enterprise is a member of a group, the criteria used to determine the SME status are more complex. To learn more about these, please refer to our Strategies page “What is a SME?”.

Large Company Scheme

A large company is a company that is not an SME. A large company can deduct 125% of expenditures incurred in carrying out R&D. A large company is precluded from claiming the enhanced deduction on subcontracted R&D work, except where the work is let to a non-taxpayer or an individual. Unlike SMEs, a large company is precluded from surrendering its enhanced deduction in exchange for a cash refund. A large company does not have to be entitled to the ownership rights in the intellectual property that results from an R&D project, in order to claim the incentives associated with that project.

Vaccines Research Relief

In 2003 incentives were introduced to encourage companies to undertake certain research into the development of medicines and vaccines. The incentives apply to expenditures made on or after the 22 April 2003 on R&D activities directed towards the development of vaccine and medicines for the prevention and treatment of tuberculosis, malaria and HIV/AIDS.

Under this initiative, Large Companies and SMEs undertaking activities eligible for VRR are entitled to deduct an additional 50% of qualifying expenditures. VRR can be claimed in addition to the relief available under the Large Corporation and SME Tax Credit Programs.

SMEs not in profit can surrender any losses arising from VRR in return for a payment of a vaccine tax credit (VTC) equal to 16% of the VRR. The total tax credits (SME payable R&D tax credits and VTC) payable to a company for an accounting period may not be more than the company’s PAYE and NIC liabilities for payment periods ending in that accounting period.

Large Companies are not eligible to claim the VTC.

Companies can claim VRR for subcontract payments. There are less stringent rules if such work is subcontracted to universities, charities and scientific research organisations, than to others. Companies can also make contributions to independent research carried on by such bodies.