R&D tax credits are theoretically open to companies across all sectors – it’s the nature of the innovation rather than the nature of the business which has to meet the requirements.
R&D tax credits are a form of tax relief used by the Government to incentivise investment by UK companies in innovation.
Where a business can show they have invested time, effort and money into innovating through research and development for their specific industry sector, they may be eligible to recoup a percentage of their R&D expenditure against their tax bill.
The UK Government introduced the tax incentives to stimulate R&D and innovation, given the correlation between innovation and performance in an economy.
While the number of claims has increased since the scheme was introduced in 2000, levels are far below expectations; HMRC estimate that only a small proportion of companies who would be eligible to claim relief are currently doing so.
There are also regional discrepancies, with businesses in the North West and North East of England consistently making fewer claims than companies across the rest of the country.
From our experience, it seems that while companies may be aware that the Government offers an R&D tax scheme, what is often underestimated is the breadth of eligibility – including sectors as broad as food and drink, aerospace, transport and retail.
In addition, the claims process itself can also be off-putting for companies; the perception of reams of forms to be completed, and the pressure of getting the figures right and avoiding attracting unnecessary HMRC scrutiny.
But the levels of tax deduction available to eligible companies are highly attractive, and certainly we would encourage any business that believes they may have a claim to take advice to ensure they are not missing out.
What is the R&D tax credit scheme?
R&D tax credits work by allowing a company to deduct a percentage of allowable R&D expenditure related to its trade from its Corporation Tax bill.
Under the government scheme, R&D is classed as a project which seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.
Any UK business liable to corporation tax may be eligible for R&D tax credits, irrespective of their sector.
The level of relief will depend on the scheme the company applies under:
- For companies with fewer than 500 employees or revenue under €100m or balance sheet assets greater than €86m.
- The level of relief under the SME scheme is, as at March 2018, 230% on qualifying R&D expenditure.
- Loss-making SMEs with no tax bill to reduce may claim a cash payment.
Research and Development Expenditure Credit (RDEC) scheme
The former large company scheme, often referred to as the ‘super-deduction scheme’, was withdrawn in March 2016. From 1 April 2016, RDEC is the method of providing R&D relief for large companies.
- RDEC applies to companies with more than 500 employees or revenue above €100m or balance sheet assets greater than €86m.
- Taxable credit is at 12% of qualifying expenditure.
- Tax credit is fully payable as a cash payment or reduction of other duties for loss-making companies, up to a limit equivalent to the company’s PAYE/NIC liabilities of staff engaged in the qualifying activity.
Special rules apply for subcontracted R&D projects. For example, SMEs that subcontract qualifying R&D activities can claim tax relief on 65% of the payment to the subcontractor. SMEs undertaking qualifying R&D for large companies can claim under the RDEC Scheme.
Grants or subsidies that your company receives for your R&D project may also make a difference to your R&D claim. For example, SMEs may be eligible to claim relief under the RDEC scheme if they cannot claim under the SME scheme because of a grant or subsidy, or because they are carrying out subcontract R&D for a large company. Take advice in relation to your specific circumstances.
Does my business qualify?
One of the most common concerns for companies is whether the nature of their business qualifies for R&D relief.
R&D relief is theoretically open to companies across all sectors. Generally, it is the nature of the innovation rather than the nature of the business which has to meet requirements.
We have assisted clients in many different sectors to claim R&D tax relief. By way of example:
- Highways and airport infrastructure management company
- Medical equipment company creating technology to utilise low energy x-rays in treatment of cancer
- Facilities management company developing bespoke technologies to create online facilities management capabilities
- Taxi company which was introducing new mobile technology and communication systems
- IT & software development
We have developed a questionnaire to help identify and maximise the full extent of a company’s qualifying activity and expenditure.
What qualifies as innovation?
Your claim for R&D tax credit will require you to demonstrate to HMRC the innovative nature of the project for which you are claiming – whether that relates to a product, service or process – and that it seeks to result in scientific or technological advancement.
To make a claim, it is not necessary to demonstrate success of the project – the requirement is that you are ‘seeking’ to achieve innovation.
To ascertain if your project qualifies, consider:
- Have you developed or improved existing products or process used in your business?
- Have you developed completely new software in-house?
- Do you employ scientists, engineers, researchers or developers to innovate products/processes?
What can you claim for?
You can claim R&D tax credits on the qualifying expenditure relating to R&D projects undertaken to advance your company’s trade. This includes, among others, expenditure in respect of:
- R&D staff costs relating to employees, subcontractors and agency workers directly engaged in the R&D work – wages, salary, pension contribution,
- Materials and consumable items, utilities
- Software used directly in the R&D
- Cost of volunteers in clinical trials
Certain costs are specifically excluded from R&D relief:
- Cost of land
- Cost relating to trademarking or creating patents
- Costs of producing and distributing goods and services
- Capital expenditure, though allowance may be available on plant, machinery and buildings used in the R&D activity
How to claim R&D tax credits
Claims are made on your Company Tax Return form, CT600.
We can help with all aspects of making a claim, including appropriate use of ‘Advance Assurance’.
The first stage is to ascertain whether you have undertaken activities which will qualify as R&D.
The second stage is to calculate the level of qualifying expenditure.
Stage 3 is to ascertain how best to utilise the R&D relief to maximise the benefit in your particular circumstances. This is where specialist advice can again prove valuable.
Finally, the claim will be included in the relevant sections of your CT600 form.
It may also be possible to make a backdated claim where your company has undertaken qualifying activity, generally two years after the end of the accounting period.
It is good practice and helpful to your claim to include with your form a supporting report documenting the advancements and uncertainties faced with the project, and itemising the qualifying expenditure on which the claim us based.
Enterprise Tax will work with you to prepare an R&D report and claim and submit this to HMRC and handle all enquiries.
ETC can help with R&D Tax Credits
ETC are specialists in the field of assisting clients to make claims for R&D tax relief.
We will work with you to prepare an R&D report and tax relief claim. We will liaise with your accountants, and in cases where your CT return has already been submitted, we will prepare an amended return and submit this to HMRC together with the R&D report.
There are various ways in which R&D tax reliefs can be obtained, sometimes referred to as a combined claim. We will advise on the most effective approach for your circumstances.
We will follow up the progress of your claim with HMRC and handle any queries which they may have. The time commitment on your part will be minimal.
We can also answer specific queries you may have in relation to:
Contact our chartered tax advisers today for an initial free no-obligation discussion to consider whether you have been undertaking qualifying R&D activity and can take the opportunity to work with us to secure valuable R&D tax relief.