How UK businesses can identify projects eligible for R&D tax relief
R&D tax relief isn’t limited to companies doing work in laboratories. In fact, almost any company in any industry is eligible for R&D tax credits, so long as the business is undertaking development activities to seek to achieve an advancement in science or technology. Many businesses are doing this in their day-to-day work, from software development and engineering companies to firms working in food production.
How manufacturing and software companies can claim R&D tax credits for the development of new products
Most companies working in manufacturing or software development will be undertaking eligible qualifying activities. If the technical lead of a project (the R&D manager, lead engineer, or lead developer) is struggling to overcome the project’s technical challenges, then it will almost certainly qualify for R&D tax credits.
What type of software projects qualify for R&D tax credits?
Common examples of software development projects that may qualify for R&D tax relief include:
- state-of-the-art software for new projects, or new functionality for existing R&D projects;
- tools to extend the functionality of application software programs or of an operating system;
- extensions to database software, programming languages, or operating systems;
- software development tools, such as tools to port data across platforms, tools for image processing or character recognition;
- novel data management techniques, such as new object representations and new data structures;
- innovative methods of capturing, transmitting, manipulating, and protecting data;
- software to run new computer hardware;
- software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or,
- means of integrating hardware and software platforms.
What type of manufacturing and engineering projects qualify for R&D tax credits?
Common examples of product and process development projects that may qualify for R&D tax relief include:
- innovative product development using computer aided design tools;
- development of second generation or improved products;
- tooling and equipment fixture design and development;
- developing unique computer numerical control programs;
- designing innovative programmable logic controllers;
- designing innovative manufacturing equipment;
- prototyping and three-dimensional solid modelling;
- designing and developing cost-effective and innovative operational processes;
- integrating new materials to improve product performance and manufacturing processes;
- evaluating and determining the most efficient flow of material;
- designing and evaluating process alternatives;
- designing, constructing, and testing product prototypes;
- developing processes that would meet increasing regulatory requirements; or,
- streamlining manufacturing processes through automation.
R&D tax credit claim opportunities available across other industries
Many businesses don’t realise that they qualify for R&D tax credits or that they are not claiming their full entitlement. The R&D tax relief scheme has been in existence for over 17 years and nearly £3bn per annum is currently being claimed. On average SMEs are claiming £59,000 per claim.
If your company is taking a risk by innovating, improving, or developing a product, process, or service, then you can quality for R&D tax credits. The project must contain a level of technical uncertainty for a competent professional, so if you faced questions that left you and your team scratching their heads to find a solution, that’s a good indication that qualifying R&D activities were taking place.
What activities can be included in an R&D tax credits claims?
The following activities would be considered eligible for R&D tax credits:
- defining technical objectives;
- identifying uncertainties;
- feasibility studies;
- reviewing new and competing technologies;
- analysing, designing and developing the technology;
- producing technical specification or other documents to explain and support the R&D project and advancement;
- testing the product, process or software; and,
- planning and managing projects.
In addition, certain indirect support activities may qualify for R&D tax relief, such as:
- administration, finance, and personnel services specifically required to support R&D activities; and,
- training to support R&D.
SME or Large Company Scheme (RDEC)?
For a company to be regarded as an SME it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A large company is any company that exceeds the SME thresholds.
The relief SMEs can receive is 230% on their qualifying R&D costs. Loss-making companies can also claim by surrendering their losses in return for a payable tax credit at a rate of 14.5%
Smaller companies may feel overwhelmed by the HMRC definition of R&D, and may not have the internal resources available to do further research on claiming R&D tax credits. However, HMRC publishes a manual on R&D tax relief and has provided a simple guide on R&D tax relief for small companies . There are also specialist HMRC units able to help with your claim, and you can find further assistance by contacting a specialist R&D tax credit advisor or using a platform like Tax Cloud.
Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs – that aren’t claiming what they’re entitled to. If your company is doing ground-breaking, innovative work in any industry, it’s very likely that you qualify for R&D tax credits, and there’s no better time to make your first claim. You can only make R&D tax claims going back 2 accounting years, so if you don’t make the claims now, you’ll be missing out.