Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
What is R&D Tax Relief?
R&D tax relief is a means of encouraging companies to innovate through a cash reward for developing new technologies to substantially improve products, processes, devices, materials and services. The R&D tax credits are available to all companies and PK Accounting Service prepares claims not just for traditional manufacturing and engineering companies, but also high technology companies in software, aerospace, automotive and energy. But don’t think you are excluded from making a claim if your business is engaged in a different sector. If you have a problem in your business and use some element of science or technology to try to fix it, then you might have the potential for a claim.
Qualifying R&D Activities
The HMRC R & D criteria are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to resolve scientific or technological uncertainties then you may be carrying out qualifying activity. This could include:
- Creating New Products, Process or Service
- Changing or Modifying an Existing Product, Process or Service.
To receive R&D Tax Relief you need to ensure that you have carried out an R&D project which meets the government definition for tax purposes and have incurred qualifying costs on this project. To claim R&D relief projects must meet all of the following criteria:
- Aims to create a scientific or technological advance in the overall field and that is not readily available in your industry.
- be considered commercially innovative and relate to your company’s trade
- has or has tried to overcome scientific or technological uncertainty.
- the uncertainties could not be easily worked out by a professional in the ield.
Whatever your R&D project, R&D claims are increasingly being scrutinised therefore good record keeping and a strong technical narrative to substantiate your R&D claim is important.
What kind of projects do not qualify for R&D tax credits?
Routine analysis, copying or adaption of an existing product, process, service or material, as well as attempting to improve the cosmetic or aesthetic qualities of a product, process, service or material will not itself be R&D. However, work to create certain cosmetic or aesthetic effects through the application of technology can still qualify. Other non-qualifying activities include but are not restricted to, commercial or financial steps necessary for innovation, production, distribution, storage and repair.
What costs qualify for R&D tax credits?
When putting together an R&D tax credit claim, we look for the following types of R&D qualifying expenditure:
- Staff Costs: Cost of directly employing staff who are actively engaged in R&D activity. Includes: class 1 NIC, pension fund contributions, bonuses and (if applicable) payment to subjects involved i.e. for clinical trials.
- External Contractors and Freelancers: Cost of paying a staff provider for staff provided to the company, or a sub-contractor who is directly and actively engaged in carrying out R&D activity.
- Consumable Items: Consumable or transformable materials used directly in carrying out R&D.
- Software: Revenue expenditure incurred on computer software employed directly in R&D.
- Utility Costs: Power, water and fuel used directly in carrying out R&D.
Types of relief claim
There are different types of R&D relief depending on the size of your company and whether the project has been subcontracted to you or not. If your company is micro, small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the RDEC scheme for another
- The Small and Medium sized Enterprises (SME) scheme
- Research and Development Expenditure Credit (RDEC) scheme.
The Small and Medium sized Enterprises (SME) scheme
As its name suggests, the SME scheme is aimed at small and medium-sized enterprises. However, the definition of an SME varies. For R&D purposes, an SME is defined as one with under 500 employees and either an annual turnover of €100 million or a balance sheet under €86 million.
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrender able loss
Profit Making SME
Relief of up to 24.7P for every £1 spent. Profit Making SME can reduce their corporation tax bill or receive a corporation tax repayment for any corporation tax already paid.
Loss Making SME
Relief of up to 33.35P for every £1 spent. Losses generated can be surrendered in exchange for a tax credit/cash refund at 14.5%. The amount available is the lower of the R & D enhancement and the trading loss post R & D
Here are some examples.
| Taxable profits (before R&D claim) | £100,000 |
| Corporation Tax liability on profit at 19% rate | £19,000 |
| R&D expenditure (included in the profits above) | £50,000 |
| Tax credit value of R&D expenditure (130%) | £65,000 |
| Adjusted taxable profit before corporation tax (£100,000 – £65,000) | £35,000 |
| Adjusted Corporation Tax liability at 19% rate | £6,650 |
| Corporation Tax saving (£19,000 – £6,650) | £12,350 |
If an SME successfully applies for R&D tax relief and, as a result, makes a loss for Corporation Tax purposes, the loss can be:
- carried back to the previous accounting period
- carried forward and offset against future profit
- surrendered the loss to HMRC in return for a tax credit at 14.5% of cash refund.
| Total Loss (before R&D claim) | £50,000 |
| Corporation Tax (not applicable as making a loss) | Nil |
| R&D expenditure (included in the Loss above) | £20,000 |
| R&D enhanced expenditure (£20,000 x 130%) | £26,000 |
| Adjusted loss (£50,000 + £26,000) | £76,000 |
| Refund for R&D activity (14.5% of £76,000) | £11,020 |
Research and Development Expenditure Credit (RDEC) scheme.
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. It can also be claimed by SMEs and large companies who’ve been subcontracted to do R&D work by a large company.
If you are a subcontractor working via your limited company, you may be able to claim under the RDEC scheme. If your company is engaged in a contract with a large corporation to carry out R&D activity, where the large corporation will have the rights to the intellectual property, you could be able to claim the R&D tax relief.
From 1 January 2018, the RDEC percentage was increased to 12%. So, combined with the corporation tax rate to 19% from 1 April 2017, the net cash benefit to a large company is now 9.72% of its qualifying R&D expenditure.
| R&D Expenditure | £50,000 |
| Credit Rate 12% | £6,000 |
| Gross credit amount (to be included in taxable profits) | £6,000 |
| Corporation tax at 19% | £1,140 |
| Total tax credit (£6,000-£1,140) | £4,860 |
Some examples
To give you an idea of who can claim, here are a few real-world examples of PK Accounting Service’s clients who, with our help, managed to successfully obtain R&D tax relief.
Content marketing company
The company’s vision was to create a solution for content marketers and technical companies focused on key areas, including social media management, content marketing, and speech writing. The company engaged in R&D activities to develop a bespoke web platform, providing relevant, personalised, and curated technological contents as well as an analysis of marketing score for their clients’ industry and market. The project’s field of science and technology was content research and data management software.
Creative development studio
Our second example is a company that helps brands and corporations understand and implement innovative virtual and augmented reality technologies. The company was acting as a subcontractor to deliver a particular technical solution to a large corporation, who retained the intellectual property arising.
When do I need to claim for Research and Development tax relief?
The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period. You can make your claim for R&D tax relief in your Corporation Tax return or amended return. For example, a business with an accounting year end of May 31st, 2018 has until 30th 2020 to claim or lose out
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