Claiming research & development tax reliefs

The UK government offers Research and Development (R&D) reliefs. These tax credits support businesses that work on innovative projects in science and technology.

It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects. You may be able to claim Corporation Tax relief if your project meets our definition of R&D.

R&D activity

Your research work to count as R&D relief must form a part of a project that makes an advance in science or technology. The work could be part of your daily routines or could be a specific project started with the intention of further science and/or technology.

To get R&D relief you need to explain how a project (and we quote from the gov. website)

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

Your project may research or develop a new process, product or service or improve on an existing one.

R&D spend

R&D is an expense based relief, this means that you are able to claim the cost to the company on a qualifying part of a project. This is important and shouldn’t be confused with employee charge out rates, which are often higher and include compensation for overheads. The costs you can claim include wages, sub-contractor costs, some materials, software, light and heat and any other relevant expenses incurred in the pursuit of a technological or scientific advance.

Capturing R&D cost is a big area in which companies need assistance. The easiest way is to implement timesheets or project tracking tools to show who worked on which projects, however, work should be done on an individual basis to create a plan which captures costs best for each company.

You must show there was uncertainty

Showing there was a technical uncertainty is absolutely vital to claiming RD tax relief or tax credits. It is an area which causes some confusion as how can you prove that something was uncertain to the entire sector? HMRC guidance helps to clear this up with one of their mantras ‘relevant R&D will occur when an uncertainty arises where the answer is not readily deducible to a competent professional’.

If you are in a directorship or management position within a company with experience and/or qualifications in that area then you are deemed to be a competent professional – therefore, if the answer is not easily defined by you, your peers or via quick research into the subject then it is very likely that a technical uncertainty exists.

Explain how you tried to overcome the uncertainty

Clearly, you should exemplify that the R&D needed research, testing and analysis. The best way to do this is to approach projects in a methodical and recorded way. What HMRC need to see is the process that a company goes through in order to achieve an advance. For example, a project that goes through several iterations, requires testing and is adapted throughout is more likely to be seen as an R&D project than a product which is developed in a very short window and worked perfectly first time. This is not to say that R&D projects can’t complete at the first attempt, but a string of these could indicate low levels of R&D.

Research and Development SME Scheme

The most common R&D relief claimed by small and medium companies in the UK is tax relief and tax credits. The costs associated with an R&D claim are enhanced by a further 130% and this number is then reapplied to a companies tax return as extra costs.

This can then do one of a few things:

  1. Reduce the taxable profit – if a company makes good profits and the R&D enhanced expenditure is less than the profits shown then the end result will be a reduction in corporation tax payable or, if looking at a past period, a repayment of overpaid corporation tax
  2. Create a taxable loss – if the R&D enhanced expenditure is more than the companies profit then this will create a taxable loss position. In this instance the company can either carry that loss forward to use against future profits with a benefit of (currently) 19% OR they can opt to surrender that loss to HMRC and be paid a tax credit at 14.5%.

Any SME can qualify for this scheme as long as they undertake relevant R&D work and are under the limits for qualification as an SME.

Research and Development Expenditure Credit

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 have been subcontracted to do R&D work by a large company.

The RDEC is a tax credit, it was 11% of your qualifying R&D expenditure up to 31 December 2017. It was increased to:

  • 12% from 1 January 2018 to 31 March 2020
  • 13% from 1 April 2020

If you’d like to know more about claiming R&D tax credits, contact Simon or Darryl today.

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Get in contact with us to see how we can help you apply for your R&D Tax Credits