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Data from HM Revenue & Customs (HMRC) analysed by tax reclaim specialists Catax suggests that more than £84 billion of Research and Development (R&D) tax credits have not been claimed, while it is estimated that around 80 per cent of eligible companies have either not claimed or have under-claimed. £54,000 is the average claim value that R&D tax credits can provide to innovating businesses. This can be used to reduce your tax bill or increase your taxable losses.
In this blog we look at:
What are R&D tax credits?
Check your eligibility
What activities qualify for R&D?
How much can I claim
What are R&D tax credits?
Research and Development (R&D) tax credits are an incentive to reward companies engaged in innovation. A UK tax relief, R&D tax credits can provide valuable funding for any company spending money on developing new products and process or improving existing ones. This relief can give your business the opportunity to claim back a proportion of your R&D expenditure as tax credits, which can reduce your tax bill or increase taxable losses. No matter the sector, if you’re spending money on research and development, then you could be eligible to claim R&D tax credits. Is my company eligible for R&D tax credit relief?
Research and development plays a massive role in any business with an aim to remain competitive. Without an R&D program companies may struggle to thrive within their market relying on mergers and acquisitions in order to innovate. The R&D Tax Credit scheme empowers innovating businesses providing funding allowing them to release their next idea or improve existing products.
Your business may qualify if that meet the following conditions;
You are a limited company in the UK subject to Corporation Tax
Have carried out qualifying research and development activities
Have spent money on R&D projects
There are a few requirements for any business claiming R&D tax credits. To find out if you do qualify check your eligibility below or get in touch to speak to a member of our team.
Check your eligibility for R&D tax credits : Do the following apply to your business?
Are you spending money on developing new processes, products or services?
Were those projects started in the last 2-3 years?
Do you employ staff across a variety of roles who work on projects that advance knowledge, and clarify uncertainty?
What are qualifying activities?
Whether you are developing products in a lab or refining a manufacturing process as long as you are making an advance in science or technology, you could qualify for R&D tax credits. It could be a project to develop a new process, product or service. HMRC have provided guidance on what types of activity needs to be present in the project for it to qualify for the relief:
an aim to advance science and technology
uncertainties that have been overcome
uncertainties that you have tried to overcome (not all projects need to be successful to qualify)
the project should not be something that can easily be solved or understood by a professional the same field
What counts as R&D?
The main part of an application for R&D tax credits is knowing what you can and can’t claim for. In most instances you can claim R&D relief on revenue expenditure, i.e. day-to-day operational costs, but not capital expenditure (money spent on fixed assets such as land and buildings), or the cost of using or creating a trademark and the production and distribution of goods and services within claim. Below we have outlined some key areas which you can include in your claim:
Direct staff costs – employees who have worked directly on the R&D project and include costs such as; gross salaries.
What does this include?
Wages, overtime and cash bonuses), employer NI contributions, employer pension contributions and certain reimbursed business expenses. Independent contractors (or ‘externally provided workers’ – EPWs) and subcontractors can be included in a claim but there are some specific rules around what can be included in a claim.
Software – Software which was needed for R&D or involved in R&D activities may be included but must have been developed / purchased for the R&D project.
Can I make a 100% claim on software?
If the software was partially used for the R&D project, then its price must be apportioned. However general software such as email hosting, Microsoft Office, ERP and MRP software costs and website hosting would be excluded.
Consumables – Materials and resources that are used up / consumed in your R&D process, such as water, fuel and power can be included in your claim.
Are all my material costs included?
Costs can be either apportioned expenses or wholly R&D expenses. But you can’t claim for materials which were not used up in the R&D process or used for products which were sold onto a client.
Subcontracted R&D – If a portion of your R&D project has been outsourced to another company for an agreed amount, you can include that in your claim.
How much can I claim?
Companies can claim up to 65% of their subcontracted R&D costs, but only under the SME scheme.
Types of R&D
The amount of money that you can get back in your claim depends on the scheme that you qualify for. There are two main schemes which we have outlined below the main differences being the size of your business, the amount of Corporation Tax that you are paying and whether you are profit or loss making. Irrespective of your business there is benefit in making a R&D claim as you can receive a return between 14.5% and 33% for SMEs.
SME R&D tax credits
If your business employs fewer than 500 employees and has an annual turnover not exceeding €100 (£86) million or a balance sheet not exceeding €86 (£74) million, you would qualify for the SME R&D tax credit scheme. With this scheme businesses have the opportunity to offset up to 33% of your R&D costs against your Corporation Tax and in some cases, you can receive this as a cash credit from HMRC.
There are a few factors that can affect your claim as an SME, if you are receiving a grant, subsidy, receiving state aid or using subcontractors to support part of your R&D project then you may need to make a claim via the RDEC scheme, or both. Also if your staff headcount is lower than 500, but you exceed both the turnover and gross asset thresholds, you will be classed as a large company for R&D relief and be assigned to the RDEC scheme. It can be a bit confusing understanding where your business may fit in. If you are in this position contact us to discuss your specific business needs.
Research and Development Expenditure (RDEC) scheme
Previously known as the Large Company scheme, the RDEC scheme is for companies with 500 or more employees, revenues over 100 million euros, and a balance sheet of more than 86 million euros. The level of tax relief can be worth around 12% of the money spent on R&D, which can mean you can earn 10p for every £1 spent on qualifying R&D. As with the SME scheme the credit can be off set against your tax liability or payable in cash.
Use our R&D tax calculator to estimate the amount you could receive from making a claim. Simply enter your estimated R&D spend into the box or using the slider and click calculate.