September 2015: Small or medium-sized enterprises (SMEs) in financial difficulties will be reassured by a First-tier Tribunal (Tax Chamber) decision concerning research and development. The Tribunal held that debt restructurings, such as debt-for-equity swaps, should not lead to a loss of research and development (R&D) relief for a small or medium-sized enterprise (SME), as long as the investor leaves the day-to-day management of the business in the hands of the existing management team.
In a recent case, a company remained entitled to R&D relief as a SME despite a banking group being a substantial shareholder. While the group’s shareholding was such that, absent any exemption, the group’s balance sheet would have to be taken into account in applying the SME limits (leading the company to lose SME status), the group was an “institutional investor” and was therefore ignored for these purposes as it was not involved in the day-to-day running of the company, and did not provide the company with financial strength or advantage exceeding that of other SMEs.
SME R&D relief : SME R&D relief is given by allowing a company to deduct an enhanced percentage of its qualifying expenditure when calculating profits or losses for tax purposes. For expenditure incurred after 1 April 2015, the percentage is 230%. If the SME is loss-making, the additional loss arising from R&D relief can be surrendered in exchange for an immediate repayment from HMRC.
Qualifying expenditure: The expenditure that qualifies for R&D relief must:
- Be revenue expenditure attributable to R&D, which is related to the trade of the SME and is done by the SME or on its behalf.
- Relate to:
- the cost of qualifying staff involved (qualifying staff are those who are directly and actively involved in the R&D including researchers or managers who plan, organise and carry out or support the R&D activity)
- consumable stores used (consumable stores include supplies directly employed in the R&D activity, essentially materials and equipment, but only where the equipment has a short useful life)
- certain subcontractor costs, or
- payments to clinical trials volunteers
There is no geographical restriction on the R&D activities qualifying for relief. For example, there is no requirement that any proportion of the activities take place in the UK.
The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at September 2015. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.