R&D tax relief for American Companies

7 November 2019 Caroline Hawkins Radius - R&D Tax Relief & Patent Box, R&D Tax Relief, Business Taxes

Many UK Companies have subsidiary or sister companies in the US and here we examine some of the similarities and differences between the R&D tax relief regimes for UK and American Companies.

The main difference between the UK and US tax system is that the US has Federal and State taxes. Here we are concentrating solely on Federal tax but it should be noted that several states offer R&D incentives too. At Federal level, the first R&D relief was introduced back in 1981, almost 20 years before the UK introduced R&D tax relief, however, the relief was not made permanent until 2015.

 

Comparing eligibility

The relief is available to companies of all sizes, unlike the UK where we have a different system for very large companies. As in the UK it applies across most industries, with manufacturing, software and technology seeing some of the biggest claims – engineers, contractors and banks etc are also amongst those who commonly benefit.

Similar to the UK regime, for SMEs the US relief operates via an enhanced deduction for qualifying costs on qualifying projects. Qualifying costs, again as in the UK, include staff costs (for staff performing, supporting or directing technological research), the cost of supplies used in performing research and the cost of contracted out research, where this is undertaken at the taxpayer’s risk and expense. As for the UK SME regime, there is no relief available for funded research – the taxpayer must have the financial risk. (There are specific exclusions here in certain group situations.)

 

Rates of relief

One of the most significant differences between the UK and US regimes is the value of the relief which in the US typically equates to 4.5-6.5% of the qualifying expenses. In the UK, the benefit can be almost 25% (although the additional State R&D incentives also need to be factored in here).

 

Comparing qualifying projects

There are many similarities between the two countries when considering the definition of a qualifying R&D project. Firstly, the research must be intended to be useful in developing a new business component – this is similar to the UK’s requirement that the project be for the benefit of the taxpayer’s trade. Second, the research must be technological and relate to the hard sciences – in the UK the R&D must relate to science (i.e. material sciences) or technology (the practical application of science). The US regime requires uncertainty over the proposed development at the outset of the project and the UK has a similar requirement for technological uncertainty. Finally, there must be a process of experimentation to eliminate the uncertainties, which is similar to the UK regime requiring a project, i.e. a number of activities conducted to a plan.

 

Examples of qualifying projects in both countries:

  • New product development or improved products
  • Software development
  • Process automation
  • Development of manufacturing processes
  • Scale up activities

As in the UK there is no requirement to keep records in a specific format – rather, taxpayers are expected to retain documentation which supports the costs included in the claim, and to maintain project narrative to explain why the project qualifies.

This highlights some of the opportunities available for US companies undertaking R&D work. If you have any questions over this, or any aspect of UK R&D tax relief, please get in touch with a member of our Radius team.

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