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How to claim R&D tax credits

You may be able to claim for tax relief on your company’s research and development (R&D) projects.

This is a government initiative, where companies can make an R&D tax credit claim against their corporation tax, to reward innovation.

However, R&D is a wider category than you might think, and therefore it is important to have an understanding of what the scheme involves to see if you are eligible to claim.

What is an R&D Tax Credit?

An R&D tax credit is an incentive for a UK business, if it spends money on activities that are concerned with research and development.

HMRC set up the R&D tax credit scheme in 2000, to support individual businesses and promote innovation across different sectors. This should help grow the UK economy.

This reward is not dependent on the outcome of an R&D project, but enables a company to claim on its R&D expenditure as either a reduction in its corporation tax, or as a cash payment.

This depends on the company having paid some tax, either as corporation tax, or PAYE and national insurance contributions.

What is an R&D Project?

For a project to count as R&D under the scheme, it must be part of something specific that is making an advance in science or technology.

It cannot apply to social sciences, such as economics, and it cannot be connected to something purely theoretical.

It may be about researching or developing something new, or improving something that already exists.

This can be a product, service or process.

To apply for R&D tax credits, you must show how your project:

  • Has explored an advance in science or technology
  • Has overcome uncertainty, or has tried to do this
  • Is sufficiently complex that a professional in its field could not easily work it out.

The aim of a project that you make an R&D tax credit claim for must be to create an advance in an overall field, and not just for the benefit of your business.

This means you cannot claim for using a technological or scientific advance which already exists, but which you are using for the first time in your sector.

Examples of Eligible R&D Activities

In manufacturing, eligible activities for R&D tax credits include:

  • Prototyping new designs
  • Materials testing
  • Improving existing products
  • Solving technical problems to give new features or properties to a product
  • Improving manufacturing processes.

In software development, R&D activities include:

  • Connecting systems that are not normally integrated
  • Addressing scalability or security issues
  • Creating new or improved algorithms
  • Developing software for processing large amounts of data
  • Applying untested development methods or system architecture
  • Developing firmware.

R&D can cover engineering projects related to:

  • Aerospace or avionics
  • Petroleum, oil and gas
  • Hydrology
  • Materials
  • Non-typical civil engineering.

For architecture and construction, eligible R&D includes:

  • Designing and building unusual structures
  • Buildings with special thermal performance
  • Retrofitting existing structures to meet new regulations
  • Designing for non-typical or challenging sites
  • Designing where environmental concerns are a special consideration.

Do R&D Tax Credits Work?

The value of R&D tax credits is in the savings you make on your tax.

The R&D tax credit scheme works by enhancing your development costs, which reduces the profits you declare. This reduces the amount of corporation tax you need to pay.

You can claim for your past two financial years, which means that if you have not made a claim earlier, you can claim a refund for the years that apply.

If your application is successful and you have already paid your corporation tax, then you should be due a rebate from HMRC.

Even if your company is loss-making you can benefit, either by the increased savings you make on your future tax, or from receiving a tax credit.  Tax credits involve HMRC physically repaying the company which is helpful for most small businesses cash flow.

You make an initial R&D tax credit claim, but you can then keep using the scheme each year, providing your company is carrying out work that is eligible. This reduces your future tax liability.

To what extent your company benefits under the scheme will depend on your level of investment in R&D, the amount of corporation tax you pay, and the size of your company.

There are different types of tax relief for SMEs and larger companies.

For larger companies, there is research and development expenditure credit (RDEC). They can claim this for working on R&D projects. It is a form of tax credit. From April 2020, it is 13 per cent of qualifying R&D expenditure.

For SMEs there is SME R&D Relief. To qualify as an SME, your company must have:

  • Less than 500 staff
  • A turnover that is under €100 million, or a balance sheet under €86 million.

How to Claim R&D Tax Credits as an SME

To apply for R&D tax credits, you need to calculate the enhanced expenditure that will cover your claim, covering:

  • Direct costs for your R&D
  • 65 per cent of any payments to subcontractors or providers of external staff.

Add these costs together, then multiply this total by 130 per cent. This gives you a deduction for your tax calculation.

Finally, take the tax calculation figure and add it to the R&D expenditure figure.

This total is the figure you will enter on your tax return.

If you make a trading loss, you can surrender this for a tax credit.

How Do You Support an R&D Claim?

To make an R&D tax credit claim, you will need to support it with details about your activities, to provide evidence for your claim.

This should include a short summary that explains what your project involved, and that it meets these conditions:

  • Your R&D project explored an advance in science or technology with the aim of achieving it
  • It had to overcome scientific or technological uncertainty
  • A professional in the field could not have easily worked out what your project was able to do.

You can use technology for the first time that someone else has developed, if it is not publicly known or available.

Scientific or technological uncertainty exists if an expert on a particular subject cannot say that something is possible to do technologically or cannot explain how it can be done.

To show you have overcome this uncertainty, you will need to provide evidence of research, testing and analysis.

What Can You Claim on R&D Tax Credit?

You can claim for the following on R&D tax credits:

  • Salaries of full-time or part-time staff
  • Subcontractor costs, if the subcontractor is an SME
  • Contract workers
  • Pension contributions for PAYE staff
  • Consumables, such as water, gas, electricity
  • Prototypes
  • Software licence costs.

There are costs you cannot claim on an R&D tax credit, and these are:

  • Travel expenses
  • Rent
  • Land costs
  • Recruitment
  • Production and distribution
  • Dividends
  • Patents and trademarks
  • Capital expenditure.

How Far Back Can You Claim R&D Tax Credits?

Normally, you would apply for R&D tax credits at the end of your accounting period, when you submit your corporation tax return.

You can submit a claim for eligible projects you have carried out within a two-year period up to the end of the most recent accounting period.

You cannot claim for any R&D activity you carried out earlier than this two-year cut-off.

What is the Deadline for an R&D Tax Credit Claim?

Normal accounting periods are 12 months long. For example, if you were filing tax returns for year ending March 31 2020, you would have until March 31 2021 to do this.

Because you can claim retrospectively for R&D, you need to work back two years from March 31 2020 to see what would be eligible. This would then cover the period April 2018 to March 2020.

If, however, you were to submit an R&D claim later than the normal tax return deadline, you would not be able to claim for all relevant activity taking place within that two-year period.

What is the Processing Time for an R&D Tax Credit Claim?

It is important to consider the claims process as a whole to understand how long it takes to process an R&D tax credit claim.

The process will typically involve the following stages:

  • Assessing and confirming your eligibility to claim
  • Collecting relevant information, technical and financial, relating to eligible R&D projects you have carried out
  • Separating the time and costs involved, including eligible and non-eligible activities
  • Where relevant, reviewing any contracts with subcontractors involved, to ensure they comply with the scheme
  • Writing up a summary of the project and preparing documents for submission
  • Reviewing all documentation before submitting it.

From your date of submitting a claim, the normal time for pay-out is 28 days if your claim is successful.

Where your claim is queried, the process can take longer.

But you should also take into account the time the process can take before submission, in terms of time and resources.

This is where using the services of a specialist accounting service to make your claim has two major benefits:

  • This outsourced resource will manage the entire process on your behalf, including collecting and reviewing evidence, and
  • It will have the experience and knowledge to optimise your claim and minimise the risk of it being unsuccessful.

Why Claim R&D Tax Credits?

Your company can reap significant rewards from claiming R&D tax credits.

According to the government’s own figures, as of June 2020 total R&D tax relief support claimed was £5.3bn, corresponding to £35bn of R&D expenditure.

There was a total of 52,160 claims mad under the R&D SME scheme.

The scheme applies to both profitable and loss-making SMEs.

For example:

  • An SME that was profitable and spent £100,000 on eligible R&D activities in a given year would have a claim value of £24,700
  • An SME that was loss-making but also spent £100,000 on R&D would have a claim value of £33,350.

An SME in any industry or sector can apply, but must:

  • Be a UK limited company
  • Have been trading for more than 12 months.

Larger companies can apply under research and development expenditure credit (RDEC).

You can apply even if your R&D activities ultimately do not meet your objectives, providing you can show you made a qualifying technical or scientific investment.

There are no minimum claim requirements, and a broad range of costs is eligible.

Speak to Venn Accounts about claiming R&D tax relief for your business

For more details about how to claim R&D tax relief, what R&D tax credit documentation you need for your claim, and the benefits of using expert support, speak to the team at Venn Accounts.

Our comprehensive R&D tax credits service is designed to help UK SME’s, tech companies and startups grow their businesses by maximising the use of tax incentives, such as R&D tax relief.

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