Introduction
We shall cover the basics of research and development tax relief, including the benefits of R&D tax relief, why it was introduced, how to qualify and how to claim.
Overview of R&D Tax Relief
A simple overview of R&D tax is that it is funding through the corporation tax system for developing new or improving products, processes, software or machinery.
It was established as the UK Government realised that compared to GDP (Gross Domestic Product), the amount invested within productivity was decreasing, especially compared to other countries around the world.
To sustain competitiveness, the UK Government introduced R&D tax in the year 2000.
Since then, the relief available has substantially increased, hence why more companies are claiming R&D tax relief now than ever before.
Benefits of R&D tax relief
What is the actual benefit of claiming research and development tax credits?
This comes down to cash flow.
R&D tax relief enables companies to recoup money when either developing or improving a product, process, software or machinery
Generally, a profit making SME will recoup 24.6% and a loss making SME can recoup up to 33.35%. Larger companies benefit from a tax saving of 10.53%
The R&D tax saving can be in the form of:
- reduction in tax
- increased losses
- Cash
- mixture of the above
Qualify for R&D tax relief
How do you know if you qualify for R&D tax relief?
There are three conditions that need to be met.
-
The business must qualify.
The business must be a going concern and must be within the corporation tax system. This normally includes limited companies (plcs and Ltds), however, other organisations subject to corporation tax can qualify, including CICs.
-
The project must qualify.
Does the project centre around difficulties surrounding science and technology. If so, then typically it can qualify.
-
The costs must qualify.
The third is costs associated with the company in undertaking R&D.
Qualifying costs
Qualifying costs include:
- Staff costs
- Externally Provided Workers (EPWs)
- Consumables (materials and utilities)
- Software
- Trials for experimental procedures.
A full explanation of qualifying R&D costs can be found here.
Time Limits of a R&D Tax Claim
What are the time limits of making a R&D tax claim?
This is fairly straightforward.
The claim must be within two years from the end of an accounting period.
As an example, for the year end 31 March 2022, a R&D claim must be submitted to HMRC by 31 March 2024.
R&D Tax Schemes
There are two different schemes available within R&D tax relief.
- The SME scheme is more generous in how much the company can recoup as a percentage of costs. This is generally between 24.6% and 33.35%.
- The RDEC is around 10% which is a significant difference.
An SME has less than 500 employees and either of:
- Turnover - €100mn
- Gross assets - €86mn
Any organisation not meeting this condition will be treated under the RDEC scheme.
Claimants of R&D tax relief
The sector is not the most important aspect to consider. If the project meets the R&D requirements, the sector is irrelevant.
But there are typical claimants for R&D tax relief?
- software developers
- manufacturers
- engineering firms
These companies could be making products,services, software or machinery for themselves or for their clients.
We work with many clients ranging from banking firms designing open banking apps to engineering firms making anti-flooding systems for towns and cities.
How To Claim
The R&D tax claim consists of a detailed financial breakdown and a supporting technical report.
We have a technical meeting with you and this helps us gather the information to prepare the technical report.
We work with you to identify the qualifying R&D costs.
By liaising with your accountant, we either provide them with the R&D costs to include in the CT600 and tax computation or we incorporate these into the tax computation and CT600. Either way, we work closely and transparently with your accountant.
All this information is packaged and sent to HMRC’s R&D tax department, so they can process the information.
The claim is usually processed within 8 weeks. Any tax refunds or payable cash credits are generally paid after an additional 2 weeks. This can change due to HMRC’s workload.
