Research and Development Tax Relief and Enhanced Capital Allowances for Small and Medium Sized Enterprise when Register a Business in UK


An enterprise of small or medium size or the SME that suffers the expense for research and development of a particular nature may make a claim for the tax relief of R&D.

The blog will be discussing the rules related to the research and development, including the small or medium sized enterprises relief for research and development, the credits of tax for the research and development with respect to a company, the case of large companies and the ATL (above the line credit of tax), the enhanced capital allowances, and finally the chargeable gains for the companies.

The expense of a capital nature on the research and development related to the trade of the company is also entirely available as a subtraction, that is, the availability of 100 percent allowances. This includes the capital expense on providing the laboratories and the equipment for research.

Generally, the SME for R&D purposes is defined in the same manner as that for the rules of transfer pricing. The definition of SME also extends itself to companies (ltd UK company) as larger SMEs with the number of employees to be less than 500, a turnover over a year not more than a 100 million euros or/and a yearly balance sheet less than 86 million euros. An ownership of SME must not be held of about 25 percent or more by a non-SME.

The expense of research and development that qualifies for the relief is the revenue expense on:

  • Consumable items and software that includes power, fuel and water.
  • The expense of external workers. This is restrained to 65 percent of the paid amounts related to these workers unless the workers are facilitated with a connected ltd UK company.
  • The expense on staff that consists of their salaries excluding the benefits, employer’s class one NICs and contributions of pension.
  • The expense of subcontracts that is of the same nature.

The reliefs of research and development for the SMEs is provided by permitting the company setup London to make a claim of 225 percent of the expense as a subtraction instead of the actual pricing.

Tax Credits of Research and Development

If a company setup London that makes a qualification for the R&D relief of SME makes a loss of trading, it may make a claim for a credit of tax that will authorize it to an instant payment again. The amount of credit is 11 percent of the lower of the loss of trading or 225 percent of the R&D expenditure that qualifies. The loss of trading that is liable to relief under the general rules is subject to reduction accordingly.

The Research and Development Relief for Large Companies

Relief of Decrement or Deduction

A company that is a large company and is not an SME, which suffers the expense of research and development of a particular nature may make a claim for a less generous tax relief of research and development.

The expense on research and development that makes qualification for the relief is the expense of revenue on the company that subcontracts the expense of the same nature to an organization of research or to an individual or partnership of the individuals, and costs of staff that includes the consumable items and the software, and the expense suffered due to workers related externally and connected with the research of its own or the research that is subcontracted to the company by a non-trading organization or by a large company.

The relief of research and development for the large companies is provided by permitting to make a claim of 130 percent out of the expense as a subtraction or deduction instead of the real cost.

The Tax Credit of Above the Type Line (ATL)

A substitute above the line credit for the research and development of large company investment can be claimed from the date of April 1, 2013.

The company should make an election for the tax credit of ATL within the duration of two years of the termination of the accounting period. As soon as the company makes a claim for the method of tax credit of ATL, then it cannot make a claim for the deduction relief for any accounting periods in future.

The amount of credit is equivalent to the 10 percent of the research and development expense. It is a receipt that is liable to tax but also serves as a credit against the tax liability of the company’s corporation.

In case of the companies having no liability of corporation tax, the following rules apply:

  • The tax credit that is paid is the net of main rate corporation tax, i.e. 23 percent in FY 2013.
  • The amount of credit of tax that it can acquire is restricted to the NIC/PAYE liabilities of the research and development staff of the company

Any amount that is above this PAYE/INC cap is sent forward and taken into account as a credit of tax of the next accounting period. As a substitute, the company can make a claim to offset the excess against the liabilities of the corporation tax of other accounting periods or of other group companies.

Enhanced Capital Allowances (ECAs)

The enhanced capital allowances or the ECAs, in short, are available on water saving and the energy saving plant and machinery. A company may go for the surrendering of tax losses that are attributable to the ECAs for a tax credit of first year of an amount of 19 percent of the loss that has been surrendered.

The Availability of Enhanced Capital Allowances (ECAs)

The expense on energy saving and water saving plant and machinery makes the qualification for the enhanced capital allowances of 100 percent.

Surrendering of the Enhanced Capital Allowances

The companies are able to make a surrender of the losses of tax attributable to the ECAs for a payment of cash, known as the tax credit of the first year or the first-year tax credit.

This tax credit is of the amount of 19 percent of the loss that is surrendered, which is subject to an upper limit that consists of the greater of an amount of 2,50,000 pounds or the net sum of the company’s NIC and PAYE liabilities for the duration for which the loss is suffered.

Where the company can make use of the loss against its profits that are taxable in the same duration or surrendered in the form of group relief, then in this case, it cannot be surrendered for a credit of the first year. Any taxes that are available to be sent forward are decremented by an amount equivalent to the amount of loss that has been surrendered.

The company should make a claim of the credits of the first year in its return for the corporation tax for the accounting period that is relevant.

If the Enhanced capital allowances’ qualifying machinery and plant are sold out within four years after the termination of the period for which the payment of credit of tax was made, then in this case, there will be a relief’s claw back. If such a scenario occurs, the loss that is surrendered will be available for the purpose of relief once again.

The Chargeable Gains for the Companies

The companies are supposed to make a payment of the chargeable gains tax or the corporation tax for the chargeable gains, and not the capital gains tax. The computation of gains for the companies and also the rules for companies in the case of chargeable gains are quite difficult as compared to that for individuals as it was slightly simple.

The Corporation Tax Liable to Chargeable Gains

The chargeable gains in the case of new company formation UK are calculated in the same manner as in the case of individuals, but difference comes in the fact that the indexation allowance is applicable and there is no yearly amount of exempt.

The companies, as mentioned before, do not make payment of the capital gains tax. Rather, the companies’ chargeable gains are included in the total profits that are liable to tax.

The allowable losses or the capital gains of a new company formation UK are calculated in a similar manner as that of the computation in the case of individuals but a few important differences exist, that include:

  • No availability of the yearly amount of exempt
  • Availability of a relief for inflation known as the indexation allowance
  • Distinct rules for matching of shares are applicable if the company acts as a shareholder

The Allowance of Indexation

The purpose of the indexation allowance is to provide relief for the element of inflation of a gain or to remove the element of inflation of a gain from the rules of taxation.

The companies hold authorization or entitlement to the indexation allowance since the date of acquisition and till the date an asset gets disposed of. Its basis is the movement in the RPI (Retail Price Index) between the starting and the ending date.

As an example, let us consider the case that if a person purchased a painting on the January 2nd, 2003 and sold it out the November 19, 2013 then the allowance of indexation remains available from January 2003 till November 2013.

The allowance of indexation is available on the asset’s allowable cost from the date of acquiring that includes the acquisition’s incidental costs. Its availability can also be found on the expense of enhancement since the month in which the expense becomes payable and due. The allowance of indexation’s availability cannot be found on the costs of disposal.

An important point to be kept in mind here is that an allowable loss cannot be created or increased with the help of an allowance of indexation. In the case of the existence of a gain prior to the allowance of indexation, then the gain can be reduced to zero by that allowance but not any lower than that. In the case of a loss prior to the allowance of indexation, then there is no existence of the allowance of indexation.

If a negative figure is obtained by the allowance of indexation, then the indexation must be taken into consideration as nil, that is, it should not be added to the indexed gain.

Companies Disposing of the Shares

There exist some special rules for the matching of shares that are sold by a company with those purchased. For the disposals, they are matched with acquisitions on the very day, the preceding nine days and the share pool of FA 1985.

The Rules for Matching

In the case of companies, the following order exists for the matching of the shares sold:

  • Shares that are acquired on the very same day.
  • Shares that are acquired in the preceding nine days, if multiple acquisitions on a FIFO (First in, first out) basis.
  • Shares acquired from the pool of FA 1985

The share pool of FA 1985

The share pool of FA 1985 consists of the shares in the same company, of the same class. These include the shares that a company holds on April 1, 1985 and are acquired by that company on or after April 1, 1982 and the shares that are acquired by that company on or after the date of April 1, 1985.

We should keep into account the following parameters:

  • The price of the shares that ignore the indexation
  • The count or the number of shares
  • The indexed price or the indexed cost of the shares

The very first step, while constructing the share pool of FA 1985 is to perform the calculation of the cost of the pool on April 1, 1985 by making the indexation of the cost of each acquisition prior to the due date, that is, before the month of April, 1985.

The operative events are defined as the acquisition and the disposal of the shares that affect the indexed value of the pool of FA 1985. The indexed rise must also be calculated and all the calculations must be carried out carefully.

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