How Do I Claim R&D Tax Relief?
The R&D tax relief scheme was introduced by the government in 2000, providing SMEs with a tax incentive in exchange for investing in innovation.
Almost twenty years on, and with a sister scheme now in place for larger businesses, more than £21bn has been claimed in R&D tax relief and research & development tax credits, with a staggering £3.5bn issued in 2016/17 alone.
That figure might have been significantly higher were it not for the common misconception that R&D tax relief is reserved only for those in a select group of industries, such as software and pharmaceuticals.
Fortunately, the reality is quite different.
There's a diverse spectrum of industries which qualify for R&D tax relief but have potentially missed out on hundreds of thousands of pounds. For example, of the 42,855 claims in 2016/17, just 295 came from agriculture, forestry and fishing combined.
According to a September 2018 government report, the average claim value for SMEs in 2016/17 was £53,876, but is your business eligible and how do you go about applying?
Applying For R&D Tax Relief
Before anything, you'll need to make sure that your work qualifies for R&D relief. The project for which you're claiming can either be for developing a new process, product or service, or improving an existing one.
It must also have:
- Looked for an advance in science and technology
- Had to overcome uncertainty
- Tried to overcome this uncertainty
- Couldn't be easily worked out by a professional in the field
You can take a look at the full breakdown of these definitions online. It is advisable to prepare a detailed technical report for a number of the projects you're are claiming. This technical report needs to address the above criteria. It isn’t necessary to write a technical report for every project you are claiming, however it is recommended that reports are produced for projects that cover at least 40% of the R&D expenditure being claimed.
Once you've established that you may be eligible, it's time to begin the process of claiming R&D tax relief. To make a claim, you'll need to enter your enhanced expenditure into the full Company Tax Return form. This is the total amount of relief you will ultimately be applying for.
Follow the four steps below to work out this figure.
Step 1 – Calculate Costs Directly Attributable To R&D
Collate as many costs together as possible that have contributed towards your R&D project. This can include staff wages, agency workers, contractors, software licenses, consumables and even travel and subsistence expenses.
Step 2 – Reduce Subcontractor Or External Staff Provider Payments
Calculate the total amount spend on unconnected contractors and third party staff providers (known as Externally Provided Workers to HMRC) then reduce this figure by 65% of the original amount.
Step 3 – Combine Costs Together And Work Out Additional Deduction
Total up the overall costs that are directly attributable to R&D as well as the new figure you now have for external staff costs, inclusive of the percentage reduction.
Step 4 – Calculate The Additional Deduction
Multiply this number by 130% for the additional deduction to include in your tax calculations, then finally add this to the original R&D expenditure costings for your enhanced expenditure figure.
If your business has posted a loss, you will have the option to convert this tax relief into research & development tax credits instead. Check out this handy HMRC guide on surrendering tax relief in favour of tax credits.
Using a professional R&D tax relief expert will of course help to reduce the hassle of claiming whilst giving you the best possible chance of receiving a fair reward that reflects your efforts in innovation.
R&D tax relief can be claimed up to two years after the end of the associated financial period, meaning that there's still time include claims relating to recent projects. For more information on how Myriad Associates can help you to maximise your R&D tax relief claim, Contact Us today and one of our specialists will be happy to help.