Have you ever wondered how Research And Development Tax Credits work? What you can claim for your business? Do you understand exactly what you could be claiming for your business? Here’s all the information you need to get you started.
The Purpose Of Research and Development
The purpose of the Research & Development (R&D) tax credit is to encourage innovation and increase spending on R&D activities for companies operating in the United Kingdom.
It is one of the UK Government’s top incentives for encouraging investment in research and development and a company’s R&D spends to be recovered, either as a reduction in Corporation Tax or a cash repayment.
Any company in any industry may be eligible for R&D Tax Credits. The key is that the company must undertake development activities aimed at achieving advancement in science or technology.
How To Qualify For Tax Credits?
When considering how to qualify for tax credits and if a project qualifies as an R&D activity, there are four main questions to consider:
- What is the scientific or technological improvement to the product or process?
- What are the technical uncertainties?
- Was there a process of experimentation to overcome any uncertainties?
- Why could this not easily be solved by a professional in the field?
Where a project satisfies the above criteria, a company may be in line for a claim against their Corporation Tax.
What Tax Relief Is Given?
There are two types of relief depending on the size of a company, SME’s R&D relief or RDEC for large companies, each with a different process and rates applied.
Focusing on the SME relief, the relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit. In addition, to the normal 100% deduction, to make a total 230% deduction.
Where a company makes a loss in the tax year, a tax credit worth up to 14.5% of the loss may be claimed in exchange for being able to carry the loss forward. This can be received as a repayment from HMRC and a great cash boost to a loss-making company.
What Expenses Can Be Claimed?
Many companies are surprised when they realise just exactly what expenses can be claimed. As long as the costs are wholly and exclusively for the R&D project then the following may be claimed:
- Staff costs, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
- Software usage and associated costs.
- Clinical trial costs, including payments to participants for taking part.
- Subcontractor and freelancer expenses.
- Materials and consumables, including heat, light and power that are used during your R&D processes.
Whilst there are some limits on the amount that can be claimed, such as 65% of the expenses for subcontractors, receiving relief on most of the expenses can be a welcomed boost for SME’s.
How Do You Go About Claiming The Relief?
As HMRC are getting stricter on claims, mainly due to fraudulent claims of an estimated £311m. From April 2023 the process will require more detail from the taxpaying companies and their agents.
It is therefore recommended that, before starting any project, a company should speak with their accountant. The accountant can provide you with the finer details of what you can claim. Plus, make an assessment on whether you qualify.
It is important that there is an audit trail of all the expenses included in the project, as well as making notes on any implications that you come across. This will strengthen your claim when it comes to discussing the uncertainties around the advancement that you are making.
R&D Tax Credit Overview
The R&D tax credit relief is a massive boost for companies looking to the future. Over the pandemic new apps, services and technology was being created at a fast pace, many of which would qualify for R&D credits.
It is always worth checking with your accountants to see if you qualify for a claim. With an additional 130% reduction for expenses, so it is always better to keep money in your company rather than the Chancellor’s and HMRC’s pockets.
About Andrew Robinson
This blog was written by R&D expert, Accountant, Andrew Robinson, Director of STS Europe. To find out more about Andrew Robinson and how Research And Development tax credits work, contact him directly, because every business is unique. You can find out more about Andrew’s own business success story from his Mind Your Own Business radio interview, with Tracy Heatley. Andrew and Tracy discuss how to make tax less taxing for business owners.