R&D tax relief isn’t limited to companies doing work in laboratories. In fact, almost any company in any industry is eligible for R&D tax credits, so long as the business is undertaking development activities to seek to achieve an advancement in science or technology. Many businesses are doing this in their day-to-day work, from software development and engineering companies to firms working in food production.
Is your business eligible for R&D tax credits?
Many businesses don’t realise that they qualify for R&D tax credits or that they are not claiming their full entitlement. The R&D tax relief scheme has been in existence for over 15 years and nearly £2 billion per annum is currently being claimed. On average SMEs are claiming £46,000 each per year.
If your company is taking a risk by innovating, improving, or developing a product, process, or service, then you can quality for R&D tax credits. The project must contain a level of technical uncertainty for a competent professional, so if you faced questions that left you and your team scratching their heads to find a solution, that’s a good indication that qualifying R&D activities were taking place.
Is your business eligible for the SME or large company scheme?
For a company to be regarded as an SME it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A large company is any company that exceeds the SME thresholds.
From 1 April 2015, the relief SMEs can receive has increased to 230 per cent on their qualifying R&D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit.
Smaller companies may feel overwhelmed by the HMRC definition of R&D, and may not have the internal resources available to do further research on claiming R&D tax credits. However, HMRC publishes a manual on R&D tax relief and has provided a simple guide on R&D tax relief for small and medium-sized companies. There are also specialist HMRC units able to help with your claim, and you can find further assistance by contacting a specialist R&D tax credit advisor.
What activities can be included in an R&D tax credits claim?
The following activities would be considered eligible for R&D tax credits:
- defining technical objectives;
- identifying uncertainties;
- feasibility studies;
- reviewing new and competing technologies;
- analysing, designing and developing the technology;
- producing technical specification or other documents to explain and support the R&D project and advancement;
- testing the product, process or software; and,
- planning and managing projects.
In addition, certain indirect support activities may qualify for R&D tax relief, such as:
- administration, finance, and personnel services specifically required to support R&D activities; and,
- training to support R&D.
How much expenditure is required to apply for R&D tax relief?
There is no set amount of expenditure required to apply for R&D tax relief, although the more your company spent on your qualifying R&D projects, the higher the corporation tax savings you will receive from HMRC following a successful claim for R&D tax relief.
What costs are eligible for R&D tax credits?
The main areas of costs that can be claimed are:
- Staff costs (gross pay, employer’s National Insurance contributions, and employer’s pension contributions)
- Agency workers/externally provided workers
- Sub-contractors/freelance workers
- Software licence costs
- Consumable items (materials or equipment used or transformed by the R&D process)
You can use an R&D tax credits calculator to see an estimate of your corporation tax savings based on your spending on your R&D projects.
What could R&D tax credits be worth to a small or medium business?
For profit-making SMEs, the R&D tax relief would reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction. The current R&D tax credits rate results in a 26 per cent benefit on R&D expenditure for profit-making SMEs. If the deduction is greater than the profit for the period, then this will create a loss for corporation tax purposes.
Where the additional enhanced R&D deduction is greater than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes. The SME can then decide between the following options:
- carry back the loss to the previous accounting period (if there was a taxable profit);
- carry the loss forward and offset against future profits:
- surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period. The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5 per cent. So as the enhanced R&D tax relief is 230 per cent, a cash credit can be worth as much as 33.35p for each £1 of eligible R&D expenditure.
Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs – that aren’t claiming what they’re entitled to. No matter what sector your company is in, it’s likely that you’re doing work that qualifies for R&D tax credits, and there’s no better time to make your first claim. You can only make R&D tax claims going back 2 accounting years, so if you don’t make the claims now, you’ll be missing out.
Lauren Olson is a technical consultant at Myriad Associates.