An important area in the Advanced Tax exam is Research and Development. This is the only expenditure on which we can always claim tax relief of more than 100%.
The enhanced allowances are available on revenue expenditure directly relating to the research activities such as staff costs, materials, software, utilities, and 65% of subcontractor costs.
The amount of tax relief available is based on the size of the business.
SMEs claim an allowance of 230% and if this creates a trading loss, the trading loss can be exchanged for an immediate cash refund of 14.5% to help cash flow.
The refund is restricted to £20,000 plus 3 x PAYE liability for the year.
Large companies get a 13% tax credit in addition to the 100% deduction. The 13% tax credit is deducted from the corporation tax like double tax relief.
The strange thing about the 13% tax credit is that it is treated as taxable income for the company and is subject to corporation tax itself at 19%.
As the tax credit is taxable income, we refer to it as an ‘above the line’ tax credit.
Once again, any unused tax credit can be refunded to the company as long as it does not exceed the PAYE liability for the year.
Any unrefunded tax credit can be carried forward or surrendered to group companies.
R&D capital expenditure including second-hand equipment is eligible for a 100% first year allowance.
It is more beneficial to claim the 130% super deduction on new  R&D capital expenditure.
So, when dealing with R&D, you have 3 types of expenditure.
Revenue expenditure which is allowable for trading purposes such as finance salaries which can be deducted from profits
Revenue expenditure which directly relates to the research activities (incurred by the scientists in the lab) which is eligible for the enhanced allowances.
Capital expenditure used in the research activity which gets the 100% FYA.
If you are planning on doing Advanced Tax or Taxation in June 2022, I recommend you purchase Advanced Tax Condensed as it is already updated for FA2021. You need to deal with at least 30 separate technical areas to pass the exam and these books will really help you. You can purchase them using the links below:
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