What can I claim for R&D Tax credits?
Posted on 6th Apr 2022
WHAT TAX RELIEF CAN I CLAIM FOR RESEARCH & DEVELOPMENT?
For innovative companies, research and development (R&D) can be a significant, but necessary, cost in developing a product or service.
Anything which allows a company to claim back tax against those high R&D costs is very important as it frees up cash to finance further R&D activity and growth.
The Research & Development (R&D) tax credit scheme is the main way the government supports these innovative companies.
In a nutshell…
This scheme allows extra tax relief (up to 130%) to be claimed for R&D costs for small to medium-sized enterprises (SMEs). It also lets any loss-making companies to convert the R&D tax credit into much needed cash.
1 Who can claim R&D tax credits?
Any SME is able claim to benefit from the scheme and claim Research & Development tax credits. To do so, however, some fairly straightforward eligibility criteria must first be met.
These eligibility criteria are as follows:-
- IS A LIMITED COMPANY – the SME must be subject to UK Corporation Tax
- IS AN SME – with less than 500 employees AND either turnover under EURO 100m OR Assets under EURO 86m
- IS A GOING CONCERN – the SME expects to continue trading for the foreseeable future and does not expect to go into administration, receivership or liquidation.
- R&D ACTIVITY – the SME must have been done R&D activity
- TRADE – The SME has a trade which relates to the R&D activity that it seeks to claim for
2 What qualifies as R&D activity?
Unfortunately, there is no single definition of what qualifies (or what doesn’t qualify) as R&D activity. Generally speaking though, under HMRC’s rules a company has to be engaged in seeking to work out the answer to “scientific or technological uncertainties” in order to claim R&D credit.
That said an SME there are several indicators which suggest that an activity could be classed as being Research & Development.
- The SME is seeking to innovate, improve, or invent something which are not currently available in the market.
This could be creating something which is new. Equally, it could be improving something which already exists to make it better.
This could relate to either a process or new technology.
It could also relate to either a product or a service.
- Whatever the project is, it must be in the field of science or technology.
- There was uncertainty. No one in the SME team knew, at the start of the project, what the outcome of that project would be. That means the final outcome was uncertain. It is this uncertainty which gives a strong indication that the project is trying to create something completely new and going beyond existing technologies or knowledge.
If a project delivers an outcome which could be considered as ‘common knowledge’ then it would be unlikely to be R&D.
Also, if an experienced professional could be expected to find the solution to a ‘problem’ quite easily then the activity is unlikely to be R&D.
- It is possible to document and evidence both the R&D activity evidence and all related R&D costs.
Documentation of what was done throughout is important because it doesn’t necessarily matter if the final outcome of the project was successful. It may well be possible to make a claim even if the project failed.
3 What costs qualify for R&D?
An SME can claim Research & Development tax credits on day-to-day operational costs associated with the R&D activity.
Costs which could be typically claimed include the following:-
1 Employee Costs
The employee costs for any member of staff who were involved in the R&D activity in some way (ie all their time doesn’t need to be spent on R&D) can be included in an R&D claim.
The costs which can be included are gross wages, employer national insurance and employer pension contributions. To calculate the qualifying cost for each employee you need to take their employee cost and multiply by the % of time spent on R&D.
Any benefits-in-kind (eg private medical insurance) or director dividends are specifically excluded.
2 Sub contractors
An SME can include the cost of subcontractors involved in R&D projects in an R&D claim.
The claim amount though will depend on if a subcontractor is connected or not.
IF a subcontractor is ‘unconnected’ then 65% of their cost can be claimed.
IF a subcontractor is ‘connected’ then, a detailed review is required as the rules are more complex.
3 Consumables and software
Most R&D projects will need physical materials. This will be particularly the case if prototypes have to be made. All such costs can be included in an R&D claim.
Similarly, most R&D projects will require computer software. This cost too can be claimed for. Where software is used which is not purely required for R&D then a reasonable proportion of the cost can be included in an R&D claim.
A couple of asides….
When making an R&D claim any amount of qualifying R&D cost is allowed – there is no minimum amount.
The time limit for an R&D tax relief claim is 2 years. The time starting from the end of a company’s accounting period.
4 How do I claim for R & D tax credits?
To make a claim for R&D Tax Credits a company must complete the relevant sections of a CT600 form and submit it to HMRC.
In doing so, a convincing technical narrative must be provided along with clear financial calculations. This narrative outlines the technical advancement and uncertainties of the project as well as detailing all the eligible R&D cost that is included in the R&D claim.
HMRC have indicated that it is likely to take 8 weeks for HMRC to process an R&D claim and then take another 6 weeks for payment to be received.
In our experience, the actual time taken by HMRC is much less than this.
Whether the time taken will be shorter or longer will largely depend on (1) the complexity of the claim, (2) the amount claimed and (3) the quality of the documentation and evidence to support any R&D claim.
5 What is the tax benefit of R&D claim?
A profitable SME can expect to receive a tax saving of £437 for each £1,000 of qualifying cost.
A loss-making SME has a choice.
EITHER carry forward the loss thus saving £437 of tax for every £1,000 of qualifying cost.
OR surrender the cost in exchange for cash – the amount received being £333.50 for every £1,000 of qualifying cost.
NOTE: These figures are based on the current 19% corporation tax rate.
If you think Research & development Tax credits might apply to you ping an email to firstname.lastname@example.org and one of the team will give you a call to discuss.
As you have probably gauged from the information in this article, it is not an exact science and it is a specialised area.
HMRC are “cracking down” in this area as there have been a number of fraudulent claims and cases where the claim has sailed close to the wind!
If you genuinely have a claim it is definitely worth pursuing as it could result in a significant tax saving for your limited company.
R&D is a specialist area of taxation and for that reason you should seek professional advice BEFORE preparing and submitting a R&D claim to HMRC.