Definition of R&D tax credits
Generally, enhanced deductions on research and development (R&D) are available in respect of qualifying revenue R&D expenditure. Companies can claim an enhanced deduction at a rate that will depend on whether they are large or small and medium sized companies (SMEs). SMEs can claim a deduction from taxable profits of 225 per cent of their qualifying R&D expenditure and. if loss making, will be able to claim a cash payment in return for forfeiting a proportion of their losses. Large companies may claim a deduction of 130 percent of their qualifying revenue R&D expenditure. Only certain expenses, e.g. a company’s own staff costs, are eligible.
An ‘above the line’ tax credit is to be introduced from April 2013 for large companies, which will be an alternative to the large company R and D tax credit regime until 2016, when it will replace that regime. The ATL credit will be paid at a rate of 10 per cent of qualifying expenditure and will increase the visibility and certainty of UK R&D tax relief and provide greater financial and cash flow support to companies with no corporation tax liability.
There is a separate regime for companies of all sizes where the R&D expenditure is capital in nature for tax purposes. This allows a 100 per cent deduction as expenditure is incurred but does not provide any enhancement to amounts.(Updated by PwC, March 20 2013)