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R&D tax relief computations

R&D tax relief computations

Client company with year end of 31 December 2011. Let's assume there are R&D costs capitalised of £100k. For the accounting period in question, I start off by taking the £100k costs, splitting this into two periods (3 months to 31/03/11 and then the remainder) and then applying 175% relief to the pre-31/03/11 costs and 200% relief to the post-31/03/11 costs to arrive at the allowable deduction in the adjusted loss computation.

Then, when the surrenderable loss is arrived at (let's say £300k for example), again this is split into pre and post 31/03/11 figures on a days basis and the repayable tax credit is 14% and 12.5% respectively.

Once arriving at the repayable tax credit, if this figure is more than the company's PAYE and NIC liabilities for the year, the repayable credit is restricted to the PAYE and NIC per the payroll.

Does this sound correct? I am, of course, assuming all other conditions and relief within the SME scheme are applicable in this example.

Thanks for any help folks.


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16th Apr 2012 09:43

Pretty much correct.

Although indicative only, how do you arrive at a surrenderable loss of £300k from expenditure of £100k?

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to taxwriter
16th Apr 2012 10:12

Decent text on this ?

BKD wrote:

Although indicative only, how do you arrive at a surrenderable loss of £300k from expenditure of £100k?

I thought that as well.

I have done a couple of these recently, and thought I might try for a few more. If anyone is aware of a really good plain english coverage of the subject to flesh out my knowledge, I would be intersted in hearing.



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By RandD
17th Apr 2012 09:02

Worth mentioning that the costs are split on the basis of when they are actually incurred, i.e. pre 31st March and post.

Also, be aware of the other caps - trading losses in period and £10,000 de minimis before 1.4.2012


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By afairpo
02nd May 2012 18:10

Check why the costs have been capitalised

I'd check why the R&D costs have been capitalised as well; unless it's because they are software development costs associated with hardware costs, check that the R&D does actually qualify. R&D costs are usually only capitalised in the accounts (other than software costs) when the economic benefit expected is reasonably certain, which would usually mean that the necessary uncertainty for R&D relief is no longer present ...

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02nd May 2012 20:52

Anne, come back!


I accept the point you're making, but would like to understand it a little better. Is it not possible that the uncertainty has been resolved (research), but the appreciable improvement in the state of the art that was sought has not yet been made (development)?

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By afairpo
02nd May 2012 21:21

(and back!) Project v activities
The project as a whole has to seek an advance/appreciable improvement, but the R&D relief is only available on "activities that ... directly contribute to the advance, through the resolution of scientific or technological uncertainty" (para 4 of the R&D Guidelines). There's undoubtedly some grey area of overlap (this is tax law, after all!) but, in general, costs which can be capitalised under GAAP are probably post-uncertainty.

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03rd May 2012 09:19

Thank you Anne

Yes. It's inevitably a grey area, and I think interpretations in practice (both of the guidelines and the accounting standards) are perhaps sometimes quite fluid.

Nonetheless, the thrust of the point you're making is that we might be possessed with a propensity to shoot ourselves in the feet, with R&D being so cake and eat it; tax relief and propping up the balance sheet.

It seems to me, therefore, a prudent approach if capitalising the costs to prepare ones arguments prior to making a claim, which might include that:

costs were capitalised because (the underlying "science/technology" bit having been done) uncertainty still existed, because we didn't yet know how to put it into practice, but were confident that we would within the budget we had available (which was less than the expected economic benefits)?costs were capitalised because we went on to resolve the existing scientific/technological uncertainty in the balance sheet period, demonstrating that we were "on track" at the balance sheet date?

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