R&D tax relief in the UK is a government incentive to encourage innovation by limited companies. The main scheme is referred to as R&D tax credits and, on average, qualifying SMEs are able to claim back £57,000 annually.
Because of these figures, it’s important to the fortunes of your business that you claim relief if you are carrying out qualifying R&D activity – it’s no exaggeration to say it could be the difference between success and failure.
A surprising number of businesses qualify for R&D tax credits as the definition of R&D is deliberately open. Read on to establish if you could benefit.
R&D tax credits can be claimed via your corporation tax return. This means both that they are only available to limited companies and that tax relief is received retrospectively.
You can go back two accounting periods to do this. Therefore, if you have missed out in previous years because you were unaware, you can, at least, get a bumper two-year credit first time round.
Credits are based on qualifying expenditure on qualifying activity. We’ll explore what constitutes this in a moment, but before that you should know that as an SME you can claim back 25p on every qualifying pound spent on R&D if you make a profit, and 33p on each pound if you are loss-making. R&D tax credits are accessible to larger companies, too, but only 11p for every qualifying pound is available to them.
The rules don’t set out in black and white terms what constitutes qualifying R&D. Instead, HMRC assesses each application on a case-by-case basis to judge whether it meets the criteria.
What you need to be doing is spending money on trying to resolve technological or scientific uncertainty. This could be creating something new or adapting something already in existence.
There needs to be an element of jeopardy in the outcome and because of this inherent risk, it doesn’t matter whether a project is successful or not – failed R&D can be claimed for just as much as successful innovation.
A central point to understand is that, because of the broadness of these criteria, they can be applied to just about any field.
Whether you are designing a new engine component, or integrating two cloud platforms, or developing a recipe from vegetarian to vegan, or formulating a new type of glass with unique characteristics, it’s possible that it could fall within the scope of R&D tax credits.
If you now realise you may be doing something innovative under the rules, the next step is to work out how much you are spending on the innovation.
One person tinkering in a shed, even under the umbrella of a limited company, is unlikely to qualify significantly and this is because the value of the claim is based on certain expenditure related to the R&D.
The biggest aspects of this may be the salaries (and related employment costs, like NI) of people working on the R&D, and the materials consumed or transformed by the R&D process (including utilities).
But you can include other costs in the claim too, such as:
● Subcontractor or freelance costs
● Some software costs
● Payments to people in clinical trials
In the October Budget, the Chancellor added data and cloud computing costs to the qualifying expenditure in coming years.
Innovative businesses often work in competitive fields, and so any advantage that is open to you should be grabbed with both hands.
A decent R&D tax credit claim could help you hire new staff, open up extra channels of research and development or simply ease cashflow.
We can help you identify what qualifies and, importantly, what does not, so you can make an accurate claim to HMRC. Get in touch with us to start talking about R&D with one of our experts.