Research and Development (R&D) tax credits were introduced in the UK in 2000 for Small and Medium-sized Enterprises (SMEs), and two years later for larger companies, as an incentive for businesses to invest in innovation.
The basic principle of the scheme is to reward companies that invest in developing new products, processes or services – or enhancing existing ones – through either a reduction in tax, or a tax credit (cash payment). The credits can be significant, in some cases up to 33p for every £1 of qualifying spend.
There are a broad range of guidelines and conditions which companies need to meet to demonstrate that their particular projects qualify for relief, and the way you claim that relief will depend on whether you are an SME or a large company. An SME has fewer than 500 employees, and either an annual turnover under €100 million, or a balance sheet total under €86 million.
What projects qualify for R&D tax relief?
The official definition for a qualifying R&D project is one which ‘seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’ – rather than a project which simply extends a company’s knowledge or capability.
While that definition may seem very specific, it actually means that quite a wide range of project work could be eligible. For example, if your company is looking to develop new products, processes or services, or modify existing products, processes or services, and there is no certainty that such development is scientifically or technologically possible – or you don’t know how to achieve it in practice – then you could be deemed to be ‘resolving scientific or technological uncertainties’, and therefore qualify for R&D tax credits. The HMRC website and the Department for Business, Innovation and Skills give more detailed definitions of scientific or technological advances as well as scientific or technological uncertainties.
It’s also worth remembering that under the HMRC research and development definition, R&D doesn’t have to have been successful to qualify, and in some cases (depending on whether a claim is made under the SME or large company scheme) you can include work that you or your company does for a client as well as your own projects.
What costs can I claim for?
- If your company and the project both meet the conditions, you can claim tax relief on a range of revenue expenditure (i.e. the day-to-day running costs of the business, not capital expenditure on assets). These include:
- Staff costs – including salaries, employer’s NIC and pension contributions – for staff actively engaged in carrying out R&D itself (if the employee was only partly engaged on R&D activities, you can only claim for an equivalent proportion of the cost).
- Expenditure on subcontractors and externally provided workers, again if they are directly and actively engaged in carrying out R&D.
- Expenditure on materials and consumables – this includes power, water and fuel – that are used up or transformed by the R&D process.
- Expenditure on computer software used directly in the R&D.
The SME R&D tax relief scheme
If your company meets the SME and research and development conditions, it could qualify for tax relief on R&D costs at a rate of 230%. This means that for every £100 of qualifying costs, your company could reduce your taxable profits by an additional £130 on top of the £100 spent. If your company is making a loss, you can choose to claim tax credits rather than carrying that loss forward, and receive a cash payment of up to 33p for every pound spent on R&D.
The large company R&D tax relief scheme
Until April 2016, the large company R&D tax relief scheme provided relief on allowable R&D costs at a rate of 130% – effectively, an extra 30% deduction from taxable profits. However, in 2013 the Government introduced the Research and Development Expenditure Credit (RDEC) – initially to run alongside the existing scheme, but replacing it from April 2016. Under the RDEC scheme, large companies will benefit from a taxable credit at the rate of 12% (from 1 January 2018) of their R&D expenditure.
How to claim R&D tax relief
It’s always important to seek expert advice in relation to tax planning and business finance – and you should talk to us as early as you can, to enable you to maximise the benefits available to your business under the scheme. You can also read the HMRC ‘simple guide’ on R&D tax credits for more information.
You must make any claim for R&D tax relief in your company tax return or amended return, and you have up to two years after the end of the relevant accounting period to make the claim. So, for example, if your company has been undertaking qualifying research and development and has not yet claimed R&D relief, you may make a backdated claim within the anniversary of your filing date – generally two years after the end of the accounting period.
Although no additional records are required specifically for the purposes of claiming R&D relief, summary of the R&D project undertaken and explain how it qualifies as research and development, focusing on the advances being sought and the uncertainties faced, rather than just a description of the finished product; you should also include a breakdown of the expenses that qualify for relief.
What should I do next?
The team at Price Bailey has many years of experience working with companies in relation to R&D tax credits, helping a number of clients to secure significant benefits through the scheme. See how we helped Polar Manufacturing in our video here. To find out more please fill in the contact form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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