Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation and improvement. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and ultimately growing. Companies that spend money developing new products, processes or services; or enhancing existing ones, not necessarily vaccine or clinical trials are eligible for R&D tax relief.
If you are spending money on your innovation or trying to improve some processes while you are carrying your business activities, you can make an R&D tax credit claim to receive either a cash payment (if you are a loss-making company) and/or Corporation Tax reduction.
The scope for identifying R&D is huge, it exists in almost all sectors. These sectors are, but not limited to: Aerospace; Software; Fire Protection; Wineries; Electrical Engineering; Furniture; Architecture; Printing; Oil and Gas; Civil Engineering; Manufacturing; Product engineering; Environment engineering; Insurance; Food and Beverage; Waste management; Packaging and General Contractors.
And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
The criteria are purposefully broad, from taking a risk by attempting to ‘resolve scientific or technological uncertainties’ to creating new products or even development of established procedures and system, then you may be carrying out qualifying activity. R&D does not have to have been successful to qualify and you can also include the work undertaken for a client, as well as your own projects.
If you’re not sure of what qualifies for R&D, you can contact us to do a free R&D HEALTH CHECK on your activities which would determine if you are eligible for R&D.
The right scheme you use to make an R&D tax credit claim largely depends on whether you are an SME or a large company. SME for R&D purpose is a company with fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category. A large company is company that doesn’t fall into the SME category.
R&D tax credits are calculated based on your R&D spend. To make an R&D credit calculation, we help to identify your qualifying expenditure (which includes Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses; Materials and consumables including heat, light and power) and enhance it by the relevant rate (130%).
This produces your ‘enhanced expenditure’. When you deduct your enhanced expenditure from your taxable profits or add it to your loss. This will result to a Corporation Tax reduction if you are profit-making; a cash credit if you are loss-making or even a combination of the two.
Injection of cash into your business
The R&D Tax Credits provide an essential source of non-repayable funding for many small, medium and large enterprises.
Could Boost Innovation
The R&D Tax Credits help encourage businesses to invest in R&D and innovation.
Support Economic Growth
Every £1 spent on public R&D delivers approximately £7 of net economic benefit to the UK and unlocks £1.40 of private R&D investment.
FREQUENTLY ASKED QUESTIONS
1. How far back can I make a claim for R&D Tax Credits?
A business can submit an R&D tax relief claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made. This means that a business can make a claim for R&D tax relief going back 2 accounting years. The claim can be made in a company tax return or in an amendment to it.
2. Does my project qualify for R&D Tax Credits?
Many businesses don’t realise that they are undertaking eligible qualifying activities. It is not uncommon for their accountants to forget to tell them about R&D Tax Credits or even to tell them that they do not qualify. If you’re struggling to overcome the technical challenges and your scratching their head wondering how to carry out an activity, or losing sleep worrying about the technical uncertainties you face in your business – then you are almost certainly qualified for R&D Tax Credits.
3. What happens if you make a late claim for R&D Tax Relief?
HMRC will follow the guidance in their Statement of Practice SP 05/01 to deal with claims that are late. The success of these appeals depends on the facts of the case in hand; however, it is very rare that HMRC will allow a late claim based on not having sufficient time or not being aware of the R&D tax relief scheme.
4. Will HMRC make an enquiry into the company’s tax affairs if I make an R&D Tax Credits claim?
When you make a claim for R&D tax relief it will be reviewed and processed by one of the HMRC R&D specialist units. It is normal practice for an Inspector at the HMRC R&D unit to review every first claim that is made by a business. The Inspector will risk assessing the claim and this will determine the level of reviews for subsequent claims. If the Inspector has any questions relating to the claim then they will raise an enquiry, which is usually done by writing to the company. We strongly advise that a claim for R&D tax relief is supported by a detailed report which outlines the technical advancement and uncertainties as well as providing a detailed breakdown of the eligible R&D costs.
5. What type of software projects qualify for R&D Tax Credits?
Common examples of software development projects that may qualify for R&D tax relief include: state-of-the-art software for new projects, or new functionality for existing R&D projects; tools to extend the functionality of application software programs or of an operating system; extensions to database software, programming languages, or operating systems; software development tools, such as tools to port data across platforms, tools for image processing or character recognition; novel data management techniques, such as new object representations and new data structures; innovative methods of capturing, transmitting, manipulating, and protecting data; software to run new computer hardware; software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or, means of integrating hardware and software platforms.
6. What type of manufacturing and engineering projects qualify for R&D Tax Credits?
Common examples of product and process development projects that may qualify for R&D tax relief include:
- innovative product development using computer-aided design tools;
- development of second-generation or improved products;
- tooling and equipment fixture design and development;
- developing unique computer numerical control programs;
- designing innovative programmable logic controllers;
- designing innovative manufacturing equipment;
- prototyping and three-dimensional solid modeling;
- designing and developing cost-effective and innovative operational processes;
- integrating new materials to improve product performance and manufacturing processes;
- evaluating and determining the most efficient flow of material;
- designing and evaluating process alternatives;
- designing, constructing, and testing product prototypes;
- developing processes that would meet increasing regulatory requirements; or,
- streamlining manufacturing processes through automation.
7. How long does it take HMRC to process an R&D Tax Credits claim?
HMRC works to process applications for R&D Tax Credits within 28 days. However, the processing time required for HMRC to look at and consider an R&D Tax Credit claim depends largely on the nature of the claim itself in addition to the complexity of a company’s structure and its accounting.
Even the time of year can make a difference, with peak accounting times such as March and December being particularly busy and therefore slower.
8. What activities & costs qualify for R&D tax credits?
You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets).
The main areas of costs that can be claimed are:
- staff costs (Incl. gross pay, employer’s NI, reimbursed expenses, and employer’s pension contributions);
- agency workers (externally provided workers),
- software license costs, and
- consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process).
How much is an R&D Tax Credit claim worth to an SME?
For R&D Tax Credits for profit-making SMEs:
The R&D tax relief would enable a profitable SME to reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction.
The current R&D tax credits rate results in a 24.7% benefit on R&D expenditure for profit-making SMEs. If the deduction is greater than the SME’s profit for the period, then this will create a loss for corporation tax purposes.
For R&D Tax Credits for loss-making SMEs:
Where the additional enhanced R&D deduction is greater than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes.
The SME can then decide between the following options:
- carry back the loss to the previous accounting period (if there was a taxable profit);
- carry the loss forward and offset against future profits;
- surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period. The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5%. So, as the enhanced R&D tax relief is 230% a cash credit can be worth as much as 33.35p for each £1 of eligible R&D expenditure.