Does your company work on creating new innovative solutions or products? If so, it may be eligible to claim Research and Development (R&D) tax credits. R&D tax credits are a tax relief scheme that was introduced by the UK government in 2000 in order to encourage advancement in science and technology to make the UK economy more competitive. Whether the business is operating at a profit or a loss, it can still benefit from R&D tax credits. And did you know that R&D tax credits are available to many more industries than just pharmaceutical or technology? If you’d like to find out if your business could take advantage get in touch with us today.
What qualifies as R&D?
To determine if your business is considered to be in the fields of R&D, HMRC provide several guidelines which must all be met.
1. The business must undertake a project which seeks to achieve an advance in science or technology.
1.1 The advance in science or technology is to mean the overall knowledge or capability in the field of science or technology and not simply the company’s own state of understanding or ability
1.2 The advance in science or technology can include creating a completely new product, process or service; or substantially improving an existing product, process or service
1.3 Where an advance in science or technology has already been made, however it is not readily available (for example, trade secrets), a project which seeks to achieve the same advancement may still be eligible for R&D tax credits
2. Whilst undertaking the project towards scientific or technological advancement there must a key element of uncertainty
2.1 Uncertainty is to mean that it is not known whether it is scientifically possible or technologically feasible
2.2 Uncertainty can also cover where something is known to be possible or feasible, however the practicality of fulfilling or realising the end goal is unclear
3. The project must aim to achieve appreciable improvement
3.1 The improvement should be deemed significant by a competent industry professional
3.2 The improvement should be more than simply a routine or minor upgrade, analysis, or adaptation
3.3 Where an improvement arises from adapting existing scientific or technological knowledge from one field and applied to a different industry, it may be recognised as an improvement
4.1 An activity or series of combined activities must attempt to resolve the scientific or technological uncertainty in order to achieve the advance
4.2 This may include building software, material or equipment needed to resolve the uncertainty so long as it is for the sole purpose of doing so
4.3 Planning of scientific or technological activities will be seen to directly contribute to the advancement
4.4 Design, testing and analysis will be considered as directly contributing to advancement
4.5 Commercial, administrative, transportation, storage, cleaning, repair, maintenance, security and distribution activities are not considered to be direct activities for the purpose of achieving scientific or technological advancement
5. Identifying when R&D starts and ends. For the purpose of claiming R&D tax credits, it is important to determine when the activities for R&D begins and finishes. HMRC provides the following guideline:
5.1 “R&D begins when work to resolve the scientific or technological uncertainty starts, and ends when that uncertainty is resolved or work to resolve it ceases. This means that work to identify the requirements for the process, material, device, product or service, where no scientific or technological questions are at issue, is not R&D.”
5.2 Where the R&D for a product, process or service has ended, new problems may arise which re quire additional scientific or technological advances in order to resolve them. This may qualify as a new R&D but a distinction is made between discovery of new problems and routine fault fixing.
6. Where a project fails. It is foreseeable that not all projects will succeed in achieving an advancement in science or technology. Nevertheless, the project can still qualify to receive R&D tax relief where money and effort has been spent on direct activity to accomplish this.
6.1 Where scientific or technological planning activities associated with the project have started but not been taken forward, due to the overwhelming technical or commercial challenges, it will still count towards R&D.
What costs can I recover through R&D?
The amount of tax relief you can recover through R&D is dependent upon what you have spent on and the size of your company. There are only certain qualifying expenditures that you can claim back on, and there are different calculations depending on whether the company is classed as a small or medium enterprise (SME) or a large company.
Those that come under SME include companies that have less than 500 employees and either an annual turnover of under €100 million or a balance sheet of under €86 million. In contrast, a large company is one which employs more than 500 members of staff and has either a turnover of over €100 million or a balance sheet of over €86 million. A company will not be considered a SME if it is a subsidiary of a larger enterprise which as a whole would fail on the above criteria.
On average, an SME can receive a refund of up to 25% if they are successful and make a profit on their project, 33% if they fail and incur a loss, and 15%-33% in instances where the company breaks even. Large companies on the other hand can claim approximately 12% back from R&D tax credits.
|Making a Loss||Breaking Even||Profitable|
|Up to 33% back||Approx 15% - 33% back||Up to 25% back||Approx 12% back|
Research and Development Expenditure Credit (RDEC)
“What if I cannot claim R&D?” There will be some instances where a company will be unable to claim through the R&D Tax Credits scheme. Large companies (those with over 500 employees) for example will have to use an alternative route known as Research and Development Expenditure Credit (RDEC).
RDEC is similar to R&D in the sense that it uses the same defining elements to establish qualifying work and qualifying expenditure. As of 1 April 2015 the tax relief for RDEC increased to 12% from the previous rate of 10%. This means that a company can either benefit from a reduction of tax payable, or payable credit should the company be unsuccessful and operating at a loss.
Most SME companies will be able to claim under the usual R&D Tax Credits scheme described in the above sections, however in some cases they will only be able to claim tax relief through RDEC.
The first example is where the SME is carrying out a R&D project on behalf of a large company (i.e. it has been subcontracted to complete R&D). In this situation the company would only be able to claim tax relief through RDEC.
The second example is where a SME has received a grant or subsidy for a R&D project. If that is the case then some of the expenditure may be claimed through RDEC. However, if the SME runs multiple projects of which only one or some of the work has been subsidised or grant-funded then those which are not are eligible to claim under R&D.
• Total expenditure on R&D project—£100,000
• Amount of grant received—£70,000 (of which some may be eligible for RDEC tax relief)
• Balance of expenditure—£30,000 (of which some may be eligible for R&D tax relief)
How do I claim R&D Tax Credits?
In order to claim R&D tax credits you will need to prepare detailed documents to support your application. Our step by step guide will take your through the process and provide details on what you will need to collate. We would suggest that you enlist expert help to improve your chances of a successful claim.
1. Produce an accurate and thorough technical report. This is a document which clearly justifies why your project qualifies for R&D. See our page “What qualifies as R&D?” for more information. It is essential that this comprehensively explains to HMRC why the work meets all the eligibility criteria, otherwise HMRC will respond with enquiries which could significantly delay your claim. In more extreme scenarios HMRC may issue penalties for misfiling.
2. Calculate the qualifying costs. To claim R&D tax credits you will need to provide a breakdown of eligible costs. HMRC will want to see exactly how much money the company has spent and on what before they will give you a refund. Make sure you are detailed and include proportions of costs which may need to be accounted for also. This is one of the most common pitfalls where companies attempt to claim for 100% of utilities for example. See our page “What costs can I recover through R&D?” for more information. If you need to split your R&D claim between RDEC and SME R&D tax credits then be sure to explain this in full.
3. Calculate total eligible tax relief. It is up to the company to put a figure on the tax relief they believe they are entitled to. This is referred to as the ‘enhancement’. This is calculated by multiplying total allowable costs by 130% and adding that to the original total allowable costs. There are different rates for different years so it is important to seek the advice of a specialist accountant in order to make sure the figure has been correctly calculated.
- Total allowable costs—£150,000
- Allowable costs multiplied by 130% – £195,000
- Add two figures together for ‘enhanced expenditure’ – £345,000
4. Complete the CT600 form.This is the Corporation Tax form which needs to be filed and submitted to HMRC annually. It is particularly important to fill in this form correctly as it’s the form that allows you to make your claim for R&D tax credits. It needs to include all of the above documents and calculations.
5. Receive cash.If accepted, HMRC will provide payment within 3 – 8 weeks. If HMRC are unconvinced by the application the company will undergo further enquiries.
The key to a successful R&D claim is to complete the correct forms with succinct supportive documents and accurate calculations. Admittedly these can be complex and is why we often recommend seeking professional support when you claim R&D.
The other decision which many people forget to consider is if a business venture is failing, would it be a better option to carry forward trading losses against future revenue, or should the company receive instant tax credits instead? We can certainly advise which would be better depending on your individual circumstance and your overall business goals. To discuss your potential R&D claim further, make a free no-obligation appointment today by calling 01865 24 55 11.