Research and Development Tax Credits (R&D Tax Relief) were introduced almost twenty years ago by Government to encourage innovation in UK companies. For qualifying companies, the relief is in the form of a reduction in Corporation Tax liabilities or sometimes a Payable Tax Credit (cash payment).
Many businesses struggle to understand what qualifies for R&D Tax Relief. There are also numerous misconceptions floating about, making it even more difficult to discern when and if they can claim. However, with a claimable benefit of between 18 – 33% of qualifying spend on R&D, it’s certainly worth doing the research.
One of the fundamental parts of making an R&D claim is identifying the qualifying activities. Many companies assume their accountant will do this for them. However, a company’s accountant may not be aware of these activities or have the industry specific knowledge to understand if they qualify. Qualifying activity can often be missed – the company owner doesn’t know what qualifies so doesn’t tell their accountant about the work – their accountant isn’t aware of the work so doesn’t consider R&D Tax Relief, it’s a self-perpetuating cycle.
In this guide, written by Vicky Kwenda of R&D Consulting, we’ll be looking at what does and doesn’t qualify and how to compile a defendable R&D claim. We’ll also look at common misconceptions and pitfalls of each step in the process.
Step 1: What’s the timeframe I can claim for?
There is a 2-year time limit on submitting an R&D claim, so most companies submitting for the first time will be looking at their last two accounting periods. If the tax return for an accounting period has already been submitted then it is a simple matter of re-submitting an amended version, as long as it is within the 2-year timeframe.
Step 2: Which scheme are we looking at?
There are different schemes for large companies and for SMEs, and the definition of a large company is different for R&D Tax Relief. When deciding which scheme your company falls under you need to look at the following: staff headcount, turnover and balance sheet total. You may also need to include the data (or a portion) of any partner or linked enterprises.
To be considered an SME for the purposes of an R&D claim, your data needs to show a headcount of under 500 and either turnover less than 100M€ or balance sheet less than 86M€. Please note that the figures are in euros and not GBPs as they have to be in line with EC (European Commission) recommendations.
The main differences between the schemes are the costs that can be included and the level of benefit achieved, with the relief for the SME scheme being much more generous. This guide will focus on the SME scheme. TIP: Some types of funding may affect an R&D claim.
Step 3: What projects qualify?
There are 4 main criteria which must be met for a project to qualify for R&D Tax Credits.
- Project is based in science or technology
- Project is seeking to create an advance via the resolution of scientific or technological uncertainty
- There is a financial risk related to overcoming the uncertainty
- The advance is identified by a competent professional
If you can meet all of the above criteria, great news, you have the basis for an R&D claim. It’s not a requirement to produce a report showing how a company meets the criteria but it’s much better to do so, and will reduce the risk of an enquiry.
TIP: It’s fine if only certain parts of a project contain uncertainty/create an advance.
STEP 4: What costs qualify?
Once qualifying activities have been identified, the next step is to discern what costs can be assigned to those activities. There are three main categories of qualifying expenditure and if a cost doesn’t fall into one of these, it can’t be included in the claim. These could include things like staff costs or subcontractor costs, and as with the project information there is no requirement to show a breakdown of your costs, but it is a very good idea to do so.
TIP: Even though staff costs can make up a large part of an R&D claim, dividends cannot be included.
STEP 5: Submission
At this point, the claim is almost ready to submit. Submission of the claim is via a company’s tax return. It involves filling in a few boxes on the CT600, and attaching supporting documentation. If you haven’t involved an R&D expert up until this point, this would be a sensible time to consult one to ensure that your claim is submitted in the best possible way, with the greatest chance of success.
TIP: HMRC have a 12-month window from the time a claim is submitted, where they can open an enquiry. It’s vital that any claim submitted can be defended upon enquiry, even if that turns out not to be necessary.
STEP 6: Benefit
On the result of a successful R&D claim, benefits will be received as either;
- Repayment of already paid Corporation Tax
- Reduction in the amount of Corporation Tax due to be paid
- Payable Tax Credit
- Losses carried forward into a future accounting period
It could also be a mixture of these benefits. Any funds to be received will usually turn up in around 4-6 weeks although there are backlogs at certain times of the year.
TIP: Many people are unaware that loss making companies can still make a claim for Research and Development Tax Relief. As they will have no Corporation Tax to pay, they can either keep the relief and use it to offset future Corporation Tax liabilities or they can surrender the relief for a cash payment (Payable Tax Credit).
STEP 7: REPEAT the above process
As long as qualifying activities are being undertaken, R&D claims can be made each year. This will be a lot easier if key information is recorded throughout the year. HMRC will also expect that more accurate records are kept once a company becomes aware of R&D Tax Relief.
R&D activity can be found in most industries. The most common are manufacturing, engineering, software development, recycling, food and drink and architecture, so if you work in any of these industries, it’s worth having a chat with either your accountant or an R&D specialist to see if there is potential for you to make a claim. If you’re not sure whether you qualify, a professional should be able to let you know in about 15 minutes if it’s worth your time looking any further at R&D Tax Credits (free of charge).
If you do move forward with making a claim, make sure you are assisted by a reputable firm, with experience of submitting successful claims in your industry, on a no-win-no-fee basis, with no upfront or admin costs and do not sign a lengthy contract (if they are good at what they do, you will work with them again anyway).
Vicky Kwenda is a specialist consultant in Research and Development Tax Credits and has been working for R&D Consulting since it was founded in 2012.
R&D Consulting’s mission it to get more UK companies claiming R&D Tax Credits and Vicky is determined that the way to do this is by educating the relevant people and demystifying the process.