Far too many businesses are letting their inventiveness go to waste and are missing out on money they could claim back from HMRC.
If your company has made a capital investment in an innovative project, you may be able to recoup a large chunk of that expenditure by way of R&D tax credits, even where that project has not proved to be profitable.
R&D tax credits are a form of corporation tax relief that encourages UK companies to research and develop advances in science and technology.
Who can claim R&D tax credits?
R&D tax credits can be claimed by companies across a wide range of industry sectors, including but by no means limited to manufacturing, engineering, construction, transport and retail, as well as food and drink.
In theory, this type of relief is open to companies across all sectors. Generally speaking, it is the nature of the innovative project rather than the nature of the business that has to meet the R&D requirements.
It is therefore crucial that the R&D project meets the definition of ‘research & development’ (R&D).
What are the qualifying criteria for R&D tax credits?
To qualify for R&D tax credits the work undertaken by your company must satisfying the following criteria:
- It must be part of a specific project to make a scientific or technological advancement in your particular field. Any work relating to the social sciences, such as economics, or theoretical fields like pure maths, will be excluded from this form of tax relief.
- It must also relate either to your company’s existing trade or a trade that you intend to start up based on the result of the research and development undertaken. In other words the project must fall within your particular, or proposed, field of work.
How can a claim for R&D tax credits be supported?
To qualify for R&D tax credits your company can research or develop a new process, product or service or improve on an existing one. However, in order to successfully claim back any tax relief you will need to explain how the project:
- looked for an advance in science and technology – your project must aim to create an advance in the overall field, not just for your business. This means an advance can’t just be an existing technology that has been used for the first time in your sector.
- had to overcome uncertainty – your company should be researching or developing something that isn’t known to be scientifically or technology feasible when you make or discover it. This means that your company or experts in the field can’t already know about the advance or the way you achieved it.
- tried to overcome this uncertainty – you will need to be able to explain the work you did to overcome the uncertainty, although this can be a simple description of the successes and failures you had during the course of the project.
- could not be easily worked out by a professional in the field – you will need to explain why a professional couldn’t easily work out your advance, for example, by showing that other attempts to find a solution had failed.
Although your claim for R&D tax credits will require you to demonstrate to HMRC the innovative nature of the project for which you are claiming, the requirement is simply that you are ‘seeking’ to make an advance in science and technology, not that you have successfully done so.
Furthermore, if you have professionals working on a project, they ought to easily be able to explain to the satisfaction of HMRC the nuances of the R&D aspects, and what uncertainties had to be overcome.
How are R&D tax credits calculated for SMEs?
Companies of any size can claim tax credits for research and development, although small and medium-sized companies (SMEs) tend to get a much better deal than the larger companies.
The level of R&D relief will depend on the scheme under which you apply. You can claim SME R&D relief if you are a SME with fewer than 500 employees, or revenue under €100m or a balance sheet total under €86m.
Under the SME scheme companies can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction. The overall level of relief is therefore 230% on qualifying R&D expenditure.
An SME may also be entitled to claim a tax credit, ie; a cash payment, if the company is loss making, worth up to 14.5% of the surrenderable loss.
How are R&D tax credits calculated for larger companies?
For larger companies, there is what’s known as ‘Research and Development Expenditure Credit’ (RDEC). This replaces the relief previously available under the large company scheme.
RDEC can also be claimed by SMEs who have been subcontracted to do R&D work by a large company, or who have received a grant or subsidy for their R&D project.
The RDEC is a tax credit for 12% of your qualifying R&D expenditure. Depending on whether your company is profit or loss making, the credit may be used to discharge the liability or result in a cash payment.
What can you claim for under the R&D tax credits scheme?
You can claim R&D tax credits on qualifying expenditure relating to projects that meet the definition of ‘research & development’. This includes expenditure in respect of the following:
- Direct R&D staffing costs
- Externally provided R&D workers
- Consumables and utilities
- Software directly used in the R&D
- Clinical trial volunteer costs.
However, not all costs qualify for R&D relief, where the following are excluded:
- The production and distribution of goods and services
- Capital expenditure, although an allowance may be available on capital assets, such as plant, machinery and
- buildings used for R&D activity
- The cost of land
- The cost relating to the use and creation of trademarks and patents.
How is a claim for R&D tax credits submitted?
Claims for R&D tax credits will need to be submitted on your company tax return form. You will need to include the tax computation, including your R&D expenditure, as well as a technical narrative to support your claim.
Completing your CT600 form for corporation tax can be challenging and seeking specialist help is always advisable, not least where you wish to submit a backdated claim for R&D tax credits.
Typically, you have two years from the end of your accounting period to submit a claim for R&D relief.
Key takeaway for R&D tax credits
It is estimated by HMRC that only a small proportion of companies who would be eligible to claim R&D relief are currently doing so, notwithstanding that R&D tax credits can offer significant financial benefits in the form of a tax reduction or cash payment.
Many companies simply don’t know that this type of tax relief applies to them, or they feel that they haven’t got the time to justify any claim to HMRC.
It is therefore important to familiarise yourself with how R&D credits work to ensure that your company can maximise any potential tax benefits when embarking on a new scientific or technological project.
You should also seek professional financial advice in the event of any uncertainty, or if you need help completing and filing your CT600.