What is Research & Development (R&D) tax relief?
The R&D tax relief aims to incentivise innovation and increase spending on R&D in industries such as the games industry through relief from corporation tax. It either allows qualifying expenditure to be deducted from taxable income or, in the case of loss making companies, a cash rebate to be claimed from HMRC.
For R&D tax relief to be available, the company must be undertaking development activities that seek to achieve an advancement in technology.
How can R&D tax relief help your studio?
A profitable studio can deduct up to 230% of eligible costs from its taxable income and, therefore, significantly reduce its corporation tax bill. This represents an additional corporation tax deduction of 130%.
For loss making studios, a rebate in the form of a cash payment is available of up to 14.5% of qualifying expenditure.
R&D tax relief can generally only be claimed for expenditure within the last two accounting periods.
What activities can qualify for R&D tax relief?
For tax purposes, R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology.
It should be borne in mind that an activity that is eligible for R&D tax relief does not always need to result in a viable solution. Expenditure on activity that seeks a solution, but ultimately fails, can also form part of an R&D claim.
The criteria for qualifying costs and activities are purposely broad. HMRC stipulates that the important criterion is not ‘what’ is produced but ‘how’ it is produced. HMRC has confirmed, however, that no matter how original, a game storyline will not qualify as a scientific or technological advance, and therefore expenditure on the storyline will not qualify for R&D tax relief.
HMRC has provided the following example of the application of R&D tax relief in the context of the games industry:
“A company realised that each object on a game’s screen had to be programmed in respect of its interaction with all the other objects. As the game became more complex, more objects were introduced and the amount of code required rose exponentially. The solution was to programme the properties of each object. When the objects interacted, a separate code was no longer required as the inherent properties produced the outcomes. The qualifying expenditure on developing this innovative code would qualify for R&D relief.”
Very small companies dealing in subcontracted work may qualify if the work undertaken is sufficiently innovative, even if the larger contractor’s project does not qualify.
What costs will qualify?
Costs incurred in respect of direct and externally provided staff, subcontracted R&D, consumables, software, trials, prototyping and independent research costs may all qualify for R&D relief.
How does R&D tax relief interact with other reliefs?
Where small or medium-sized enterprise R&D tax relief is claimed on a project, that project cannot claim Video Games Tax Relief (VGTR). This means that if a studio chooses to claim VGTR, the same expenditure on a project would not qualify for R&D tax relief.
However, with the right advice and structuring, there can be ways for studios to take advantage of both VGTR and R&D tax relief. This is a complicated area and we recommend you take legal and accountancy advice.
How to claim the R&D tax relief
You can claim R&D relief by entering the total qualifying expenditure on the full Company Tax Return form, CT600. A further report should be attached to the return which demonstrates that the expenditure was incurred because the company has addressed a technological uncertainty and attempted to overcome it.
Many businesses are deterred from making a claim due to the intensive reporting procedure and potential for further investigation from HMRC. However, there are specialist R&D advisers who can assist with assessing whether a business undertakes qualifying R&D and with identifying potential expenditure to be included in the claim.
Where can I find out more?
HMRC provides further guidance here: http://www.hmrc.gov.uk/gds/cird/attachments/rdsimpleguide.pdf
 A small or medium sized enterprise (SME) is a company with less than 500 employees with either: an annual turnover under €100 million or a balance sheet under €86 million. A company is not an SME if it’s part of a larger enterprise that, when taken as a whole, would fail these tests. Relief under the Large Company Scheme is broadly based on the SME scheme, with a number of modifications. In particular, the cap on R&D relief for SMEs of €7.5 million does not apply to the Large Company Scheme on the basis that the relief is not regarded as state aid.