What are R&D tax credits?
Research and development (R&D) tax credits is an incentive scheme aimed at ambitious companies looking to reinvent or improve the way they do business through scientific or technological developments. Introduced by the government in 2000, the scheme seeks to encourage development and innovation rather than putting the financial onus on those businesses that are willing to take a chance on investigating something unknown or exploring a new way of doing things.
What counts as R&D?
This type of research and development could come in a variety of guises, from improvements and advancements on existing processes, through to the creation of entirely new products. Areas such as software and engineering design and development, construction techniques and processes, and the creation of new pharmaceutical drugs all fall under the remit of R&D.
Many of these developments result in the company saving money, increasing efficiency, or otherwise expanding existing knowledge. What is important is that this advance in science and/or technology must seek to improve overall knowledge or capability, not just the company’s own understanding or ability.
While determining what does and does not qualify can be difficult to judge, it is useful to bear in mind that there has to be an element of the unknown, or a possibility of failure inherent in the project. If the result of a proposed project is already certain, or there are no questions to be answered, then this is not likely to qualify as research for R&D tax relief purposes.
Am I eligible to claim?
Due to being a corporation tax relief scheme, R&D tax credits are available to limited companies only, not sole traders. As already mentioned the project must aim to bring about either a technological or scientific advancement; this does not include work in the arts, humanities, or social sciences. This useful factsheet details the type of projects - and which parts of the process - do and do not qualify for R&D tax relief.
What if the project doesn’t result in an advancement?
Even if the project failed, so long as it meets the other criteria, you will still be eligible to claim the relief; it is the intention to achieve an advancement rather than the ultimate end result which counts when it comes to claiming R&D tax relief.
What can I claim for?
Stages of the project which qualify for tax relief are varied, and as part of your application you can submit a claim for things such as:
- Internal and external staffing costs, including sub-contractors and trial volunteers
- Consumable items such as energy costs
- Bringing a product to the prototype stage (provided the prototype is not intended to be sold)
- Software and some hardware costs, including licenses
While the initial work undertaken to identify a potential project (such as market research) is not classed as R&D, once a project has been confirmed then the planning stages from this point onwards are R&D and therefore tax relief can be claimed for the costs incurred. The R&D period lasts until either the project reaches a successful conclusion, or alternatively when it is abandoned following a determination that a fruitful outcome will not be possible.
How much could I receive?
The rate at which you may be able to claim depends on the size of your company. There are two separate R&D relief schemes each with different relief boundaries – one for large companies, the other for SMEs. For R&D tax relief purposes, a company is classed as an SME if staff numbers are less than 500, and the company has turnover lower than €100m or a balance sheet total that does not exceed €86m.
For qualifying SMEs, an additional 130% on top of the standard 100% relief can be claimed, making a total R&D relief amount of 230%. This means that for every £1 worth of costs incurred, £23 can be deducted from the company’s trading income on its annual tax return for that year.
How are R&D tax credits paid?
For those companies turning a profit, R&D relief is used to offset the amount of corporation tax due. In the case of loss-making companies, the Research and Development Expenditure Credit (RDEC) scheme allows for a cash payment to be made at a rate of up to 14.5% of the R&D loss surrendered. Alternatively the relief may be utilised to reduce other taxes which the company is liable for such as the PAYE/NIC costs of the staff engaged in R&D activities.
How do I make a claim?
Any claim for R&D tax relief should be entered on your company tax return (CT600). You must work out your allowable costs, multiply this by 230% (if you are claiming under the SME scheme) and input this figure into box 660 (if using version 3 of the tax return). The figures you will need to enter are different if you are claiming under the RDEC scheme.
Where can I go for help and advice?
If you are considering undertaking a research project which you hope will qualify for R&D relief, it is vital that you consult an expert before proceeding. Your accountant is perfectly placed to help you understand whether your proposed project is likely to qualify for tax relief, and also advise you of the records and information you need to collate during the process. They will also be able to assist you in compiling your tax return. This will not only ensure your claim is submitted correctly, but also that you are maximising this figure by claiming for all allowable expenses.
If you need help finding an accountant to help you with your small business, Handpicked Accountants are here to help. We can recommend an accountant local to you, chosen from our carefully selected network of tried and tested professionals. Start your search yourself here, or alternatively call our team of specialist advisers on 0800 063 9258, who will be happy to make a recommendation based on your company’s bespoke needs.