R&D Tax Relief
R&D Tax Relief is a government initiative designed to encourage business investment in the area of research and development. It is a great way to reduce your company’s tax bill and in some cases to actually receive cash back from your R&D expenditure. For some start-up businesses this initiative has proved to be an essential cash-flow lifeline in the early stages of the business and a great incentive for re-investment as the company grows.
In this section we will give you an overview of how R&D Tax Relief works, current updates in the government attitude to the relief and worked examples to help you to understand.
There are companies out there who specialise in R&D Tax claims but they charge a large percentage based success fee. Actually it is something many accountancy practices can also do, often for a fairer fee.
At FKGB we specialise in working with Start-up companies and therefore we have a lot of experience and successes in R&D Tax Relief claims. Contact us for further information.
A Basic working example for a loss making SME
- You have £100K of qualifying R&D Credit:
- x 130% enhancement = £130,000
- Therefore enhanced R&D = £230,000
- £230,000 x 14.5% = £33,350
This would result in a HMRC cash reclaim of £33,350 being 33.35% of total expenses spent on R&D.
SMEs Encouraged to Claim R&D Tax Relief – News Update:
The UK government has launched a new plan to make it easier for small businesses investing in research and development to claim tax relief.
In order to increase the take-up of R&D tax relief among SMEs, HMRC will be telling them about the scheme and making it easier for them to apply. They will also work with other agencies to identify qualifying companies that could claim this tax relief but have not done so.
The tax relief is designed to encourage firms to invest in new product development by helping them to reduce the amount of corporation tax that they pay on their profits by offsetting them against investment in R&D.
According to government figures, some 15,000 SMEs claimed this tax relief in 2013, but they want more SMEs to invest in R&D and benefit from the tax relief. According to HMRC’s analysis, each £1 of tax offset against R&D investment can be used to stimulate between £1.53 and £2.35 of additional investment.
In order to encourage pioneering small businesses, this new government plan will help to increase awareness and make it easier for SMEs to apply. SMEs are defined as small companies with a turnover of less than £2 million and fewer than 50 employees.
The detail (as explained by the British Tax authority – HMRC):
R&D tax relief schemes
The way you claim tax relief depends on the size of your company:
- the Small or Medium-sized Enterprise (SME) Scheme
- the Large Company Scheme
R&D projects that might qualify for relief
Your company can only claim for R&D tax relief if an R&D project seeks to achieve anadvance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.
The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.
If your company or organisation is claiming tax relief under the SME scheme it must own any intellectual property that might arise from the project.
How to show the project is R&D within the tax definition
There are guidelines that define the following terms. These will help you decide if your company has an R&D project for tax purposes:
- advance in science or technology
- directly contribute
- scientific or technological uncertainty
Give an explanation of each of the following, when filing your CT Return, to show that the definition of R&D applies to your project or projects.
Scientific or technological advance
Consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance. This is important in judging whether or not R&D for tax relief purposes is being undertaken. Science doesn’t include work in the arts, humanities and social sciences (including economics).
It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
Scientific or technological uncertainties involved in the project
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, isn’t readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems aren’t likely to be technological uncertainties.
Set out at a high level, in a way that can be understood by someone who’s not an expert, what the uncertainties were and when they started and ended.
How and when the uncertainties were actually overcome
Describe the methods taken to overcome the uncertainties and the investigations and analysis undertaken. This shouldn’t be in great detail, but enough to show it wasn’t straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties weren’t overcome, explain what happened.
Why the knowledge being sought was not readily deducible by a competent professional
It might be publicly known that others have tried to resolve the uncertainties and failed. Or maybe others have resolved the uncertainties, but precisely how it was done isn’t in the public domain. In either case a valid technological uncertainty can still exist.
Or there’s little public information available about the project, you’ll need to show that the people leading it are competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate set out the details and have evidence available if needed.
Costs that qualify for R&D tax relief
To qualify as R&D, any activity must meet the definitions set out by the Department for Business, Innovation and Skills. These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.
If your company and the project both meet the necessary conditions, you can claim tax relief on revenue expenditure in the areas outlined. This means the day to day running costs of the business, not capital expenditure on assets.
If you’ve spent money on something like, for example, staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.
This relates to employing staff directly who are actively engaged in carrying out R&Ditself. The staff must be employed under a contract of employment directly with your company . They shouldn’t be consultants, agency workers, or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors. Employee costs that qualify for R&D tax relief
Paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D. The staff provider needs to contract with the individual whose services they supply – not through another person. Staff provider costs that qualify for R&D tax relief
Consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs. Materials costs that qualify for R&D tax relief
Payments to clinical trials volunteers
The cost of relevant payments to subjects of clinical trials. Clinical trial costs that qualify for R&D tax relief
Power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs. Power, water and fuel costs that qualify forR&D tax relief
Computer software used directly in the R&D. Computer software costs that qualify forR&D tax relief
Subcontracted R&D expenditure
If your company or organisation is claiming tax relief under the SME Scheme then you may be able to claim back 65% of what you spend on certain R&D activities carried out for you by a subcontractor.
But if the subcontractor is connected to your company, or you have jointly elected for connected parties treatment, special rules apply.
If your company isn’t an SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor. Subcontracted R&D activities that qualify for R&D tax relief
If the subcontractor is a connected party you can read the special rules for R&D tax relief in the Corporate Intangibles Research and Development Manual.
Although R&D tax relief is only available for ‘revenue expenditure’ – generally day-to-day running costs, rather than capital expenditure – if you’re involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
Read more about the difference between revenue and capital expenditure in the Business Income Manual.
How and when to claim R&D tax relief
Before claiming, read all of this guide, and the detailed technical material referred to, to make sure that your company meets the necessary conditions and that in your view, the project and expenditure qualify for tax relief.
HMRC compliance checks and enquiries for Corporation Tax
When to claim
You must make any claim for R&D tax relief in your CT return or amended return. The normal time limit for making your claim is 2 years after the end of the relevant CTaccounting period.
How to claim
You claim for R&D tax relief by putting an X in either box 99 (SME) or box 100 (large companies) of your CT return, and in both cases, put the enhanced expenditure in box 101 – that is, the actual amount spent multiplied by 230% or 130% as appropriate. You should also include this enhanced figure in your calculations of the profit (box 3) or loss (box 122) for the period.
If your company or organisation is a SME and you want to convert some or all of the tax relief into payable tax credits you’ll also need to put the amount payable to you in box 87, box 89 and box 143 – and put an X in the ‘repayment due for this return period’ box on page 1.
Although it’s not a legal requirement, HMRC encourages companies to:
- – tell them why the company or organisation considers its project(s) to be allowable as R&D
- – provide a summary of the costs incurred on the R&D and how the figures in the return were arrived at
How to complete and file your Company Tax Return (link)
How you’ll get your R&D tax relief or tax credit
If you’re just claiming relief, this will reduce your company or organisation’s profit chargeable to CT for the relevant accounting period. There’s nothing further for you to do.
But if you’ve chosen to give up your enhanced relief to receive tax credits instead, or if you’ve submitted a claim to carry back a loss to be set off against profits of a previous accounting period, HMRC will make the payment after they receive your return.
If you’ve claimed a payment and HMRC opens a compliance check or enquiry into your return, they may agree to make interim payments. When the enquiry is concluded the balance will be paid.
R&D Advance Assurance
Your company many qualify for Advance Assurance.
Once a company’s application for Advance Assurance has been accepted, for the first 3 accounting periods of claiming R&D tax relief, HMRC will allow the claim without further enquiries.
Find out more about Advance Assurance and see if your company could qualify. There is also a pre-recorded webinar giving an overview to Advance Assurance.
Capital allowances and R&D tax relief
R&D tax relief only applies to revenue expenditure – generally, costs incurred in the day-to-day running of the business, not to money spent on capital assets. So you can’t claim this relief on anything you spend on capital assets. But you may be able to claim relief for capital expenditure on R&D as a capital allowance known as ‘Research and Development Allowance’.
But if any R&D revenue expenditure is ‘capitalised’ in your company’s accounts, this may still qualify for R&D tax relief.
You can read more about R&D Relief for capitalised expenditure in the Corporate Intangibles Research and Development Manual.
There’s no specific record keeping requirement for R&D tax relief claims. But the general CT requirement to keep sufficient records to support the entries on your CTreturn still applies.
HMRC doesn’t expect you to create new primary business records just for an R&D tax relief claim. But you may need to maintain your business records in a different way, so you can access the information you need easily.
Before you make your claim, you may want to involve your R&D staff in the process. This will help you identify qualifying activities and expenditure.
HMRC may ask to see your company or organisation’s records when they make a compliance check into your CT return or R&D tax relief claim made separately from a return.
You can read more detailed guidance on keeping records for R&D claims in theCorporate Intangibles Research and Development Manual
Our experience tells us that many companies are not claiming R&D relief as they do not believe they will qualify. The UK government are encouraging small companies to claim for development expenditure as the chart above suggests, you may well be entitled to R&D relief that could be substantial and extremely beneficial to the cash flow of your business.