How UK businesses can identify projects eligible for R&D tax relief

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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.

R&D tax credits
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.