Thousands of UK companies are eligible for R&D Tax Credits but many are unaware of the scheme, think they don’t qualify, or simply don’t know how to do it.
The government scheme, believe it or not, has been running for over 10 years but of course the rules have changed over that time. The thinking behind this scheme is to encourage, through tax incentives, SMEs to invest in innovation to boost the UK’s economic advantage and growth through its ability to deliver innovative products.
R&D Tax Credits work by reducing your taxable profit and therefore reducing your corporation tax. Don’t worry if you have little tax or even no Corporation tax in the first place, or if you’re a start-up and you haven’t paid any corporation tax yet, R&D tax credits can be transferred into cash, providing help for your cash flow.
R&D Tax Credits work by reducing your taxable profit and therefore reducing your corporation tax.
So how much can I get? Let’s say, for example, for every £100,000 you spend on research and development up to £225,000 could be deducted when calculating your taxable profits (or relievable losses). The tax claim is 225% of the qualifying R&D expenditure, so as your company would have already accounted for £100,000, the balance of £125,000 would be an additional deduction from your taxable profit. Loss making companies can claim up to 14.5% .
The scheme is quite broad so research can even include some aspects of Software Development. Not all activities involved in development are claimable activity, but generally, if you are a start-up developing a product which involves issues with scalability, integration, algorithmic development and technical innovation (there’s the word) then these companies tend to qualify.
The two key criteria for being eligible for tax credits are “Innovation” and “Uncertainty”.
“We only do R&D for our clients not ourselves”
Many companies conduct research for partners as subcontractors and therefore believe it is only their clients that can claim for the R&D work. However, if you as a subcontractor are taking an element of risk, you can still be eligible for R&D Credits. If your company is taking a risk by innovating, improving or developing a process, product or service, then it can qualify for R&D Tax Credits.
“It’s not ground-breaking research”
A web developer that creates simple sites for their clients in WordPress will be unlikely to qualify for tax credits. However if your work has an element of complexity by, perhaps, integrating systems in a new and untested way, creating custom/bespoke software or developing algorithms or even incorporating augmented reality, you will be likely to qualify. It is not so much about new features and functions within software or the web but about the processes behind these features and functions. If there is technological uncertainty, it could potentially qualify.
“We haven’t done any research for two years”
Don’t worry. You can claim R&D tax credits for your last two accounting periods.
“We’ve received grant funding”
The amount you can claim back becomes limited once you have been in receipt of grant funding, but this doesn’t mean you won’t qualify. If you receive some or all of the costs of an R&D project only the unsubsidised costs may be claimed as R&D Tax Credit. This rule is stricter if the grant money comprises any form of State Aid, as defined by the EU, where a partial subsidy paid to an SME may disqualify the whole of otherwise qualifying expenditure from R&D Tax Credit.
So what can be claimed?
Costs must be ‘revenue’ in nature and not capital expenditure (there is a special Capital Allowances regime for R&D-related capital expenditure). Only specific types of expenditure can qualify for R&D:
- Staffing costs of directors and employees directly associated with the R&D activity. Pure administrative activity and similar support staff will not be eligible but occasionally in some cases an apportionment of costs may be eligible.
- An apportion of Software and/or consumable items (including water, fuel and power),where necessary.
- Agency employees, or workers who are ‘externally provided’ and actively engaged on R&D. Claimable costs are based on 65% of the payment actually made.
Generally HMRC aim to deal with 95% of claims within 28 days. So it is always worth taking a look. There are many companies out there that specialise in retrieving tax benefit, so why not take a look?
Full details of the scheme can be found here