R&D Tax Credits
Research and development – take credit for your innovation
One of the often-cited strengths of British Business is its ability to innovate and for many years governments of all hues have attempted to incentivize companies to invest in Research and Development.
For businesses that spend their cash on development, there’s a valuable tax benefit available that helps offset some of the expense and may make further advances possible.
The R&D tax credits scheme makes tax credits and allowances available to companies for expenditures on research and the great news is that it applies to a fairly broad spectrum.
There are two distinct schemes in operation currently; SME R&D tax relief and Research and Development Expenditure Credit(RDEC) for larger organizations.
The SME scheme relates to companies with less than 500 staff and €100m turnover however you may well need to add in any development partners or linked companies when working out if you fall into this category.
If the project has been subcontracted to an SME from a larger organization then the contracting company must use the RDEC method.
The R&D benefits for SMEs are much more generous than for larger companies with a relief of 100% of qualifying expenditure together with a 130% uplift giving a total credit of up to 230% of qualifying spend.
For larger companies using RDEC then tax relief is restricted to 11% of qualifying costs and whilst this is significantly less than the SME scheme it still represents a valuable tax credit.
What projects qualify?
HMRC have a fairly detailed explanation of what type of project can be included in a successful claim for R&D relief.
The initial question to ask is whether the outcome of the work was largely certain at the outset. R&D credit is given to companies that carry out work where there is an inherent risk so projects that simply build upon an already established project in some minor way are out of scope.
However, a project which radically advances knowledge in an area or produces a major step change in a sector is most definitely in scope.
Tax reliefs aren’t applicable to research that only benefits your company. Instead, you will need to show that you have made a development that will benefit a sector as a whole and has a wider application.
The advance also needs to be in the area of science and technology. Other areas of advances such as the Social Sciences, theoretical physics or pure mathematics would not qualify for R&D tax credits.
Claimants must show that there was a clear development path, from the point where the idea was born with all of the built-in uncertainties around the feasibility, to the initial scoping and design of the project, through the testing and analysis phase and if applicable the implementation and usage.
It’s a mistake to think that a claim for RDEC or SME tax relief will only succeed if the development path was straightforward and simple. In fact, being able to show that there were missteps along the way, failures and adjustments to the original thinking will add weight to the case by proving that the research was indeed a step into the unknown.
What expenses can be claimed?
Although a business may spend money on development and testing of their wares it would be wrong to believe that only costs of tangible goods are allowable against tax.
Naturally, any consumables that are used in the design and development can be claimed as well as the costs of directly attributable utilities.
In addition, staff costs can be included and these may consist not only of basic salaries of research staff but also their pension costs and Employers National Insurance Contributions. If the people working on the project are contractors then the company can claim up to 65% of the invoice costs.
It is also possible to claim support costs if you can show that they were incurred to support the business and aren’t a result of business as usual. A good example would be taking on a temporary admin assistant to carry out tasks on behalf of the project team.
Understandably there are some costs that don’t qualify for R&D tax credits and these would be things like Rent, Rates, capital expenses such as machinery and vehicles together with land and buildings.
How to claim
It’s important that you take advice before you embark on the project. You’ll need to do some preparatory work to show what uncertainty the research is aiming to solve and that your work is not repeating what someone has done or is already doing. Good record keeping is vital and this is where that admin assistant can prove so valuable.
Claiming R&D tax relief is a simple process. For SME’s, once they have the total of allowable expenses then they simply include 230% of the allowable value on their tax return.
Similarly, for RDEC larger businesses take the allowable expenditure and multiply by 11%, including the result in their CT600 tax return.
It should be noted however that there is a time limit for claims of two years from the end of the project.
Another point to bear in mind that businesses don’t need to be profit-making to benefit. After all many new starts conduct intensive research and development in the early days and this causes them to be loss-making. In these cases, it is possible to convert an allowable expense to a tax credit to be used later once the business is more established and profitable.
If your company is considering entering into some major piece of research then it makes sense to think about the benefits that may be on offer by offsetting much of the costs against a future tax bill. Being organized from the start and planning your claim could save you money.