R&D Tax Credits Explained
What are R&D Tax Credits?
The R&D Tax Credits incentive is designed to encourage innovation and increase spending on R&D activities for companies operating in the UK. It’s one of the government’s top incentives for encouraging investment in research and development and allows up to 33.35% of a company’s R&D spend to be recovered as a cash repayment.
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 £46,000 each per year.
Who qualifies for R&D Tax Credits?
Any company in any industry may be eligible for R&D Tax Credits. The key is that the company must be undertaking development activities that seek to achieve an advancement in technology. 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 your heads to find a solution, that’s a good indication that qualifying R&D activities were taking place. If your company is taking a risk by innovating, improving, or developing a process, product, or service, then it can also qualify for R&D tax credits.
A good test to determine if the work undertaken qualifies for R&D relief is whether your project team faced technological uncertainties at the start of the project. That means that your team did not know from the outset whether a particular technological goal was achievable. If you can show that your project goes beyond applying existing technologies and demonstrate that it breaks new ground, you can claim R&D tax relief.
What activities can be included in a R&D Tax Credit claim?
In terms of qualifying tasks, 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;
- 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;
- training to support R&D.
What R&D expenditure can be claimed?
You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets). The main areas of costs that can be claimed are:-
- staff costs (gross pay, employer's NI and employer's pension contributions);
- agency workers (externally provided workers),
- software license costs, and
- consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process).
What staff roles can be included in a R&D Tax Credit claim?
It is not uncommon for an R&D team to consist of many individuals from different parts of the business. Your R&D project team may include the R&D Manager, a Lead Developer, Engineers, Project Co-ordinators, CAD Engineers, Quality Control and Testing specialists, and Cost Accountants, as well as members of the senior management team.
What could R&D Tax Credits be worth to a small or medium business?
R&D Tax Credits for profit-making SMEs
The R&D tax relief would enable a profitable SME to reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction. The current R&D tax credits rate results in a 24.7% benefit (based on CT rate of 19%) on R&D expenditure for profit making SMEs. If the deduction is greater than the SME’s profit for the period, then this will create a loss for corporation tax purposes.
R&D Tax Credits for loss-making SMEs
Where the additional enhanced R&D deduction is greater than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes. The SME can then decide between the following options:
- carry back the loss to the previous accounting period (if there was a taxable profit);
- carry the loss forward and offset against future profits:
- surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period. The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5%. So as the enhanced R&D tax relief is 230% a cash credit can be worth as much as 33.35p for each £1 of eligible R&D expenditure.
A number of webistes provide a handy R&D tax credit calculator. A good calculator can be found at R&D Tax Credits Calculator
How to claim R&D Tax Credits
R&D tax credit claims are monitored and processed by HMRC. The R&D tax relief will need to be claimed by completing a few boxes on the Company Tax Return (CT600). If the Company Tax Return has already been submitted it is possible to file an Amended Company Tax Return. You can make a R&D tax relief claim going back 2 accounting periods. Although it is not a legal obligation we recommend that a R&D tax claim report is produced that justifies the technical advancement and uncertainties as well as details the eligible expenditure that is being claimed on a project by project basis.
You will need to complete a Full Company Tax Return (CT600) and not a Short Company Tax Return. The boxes that need to be completed for an SME claims are as follows:
- Box 650 - you need to put a tick in this box.
- Box 660 - you need to insert the total enhanced R&D tax relief. This is the original R&D expenditure plus the additional enhanced R&D tax relief.
- Box 530 - this will need to be completed if you are claiming a tax credit payable amount.
Will HMRC make an enquiry into the Company’s tax affairs if I make a R&D Tax Credits claim?
When you make a claim for R&D tax relief it will be reviewed and processed by one of the HMRC R&D specialist units. It is normal practice for an Inspector at the HMRC R&D unit to review every first claim that is made by a business. The Inspector will risk assess the claim and this will determine the level of reviews for subsequent claims. If the Inspector has any questions relating to the claim then they will raise an enquiry, which is usually done by writing to the company. We strongly advise that a claim for R&D tax relief is supported by a detailed report which outlines the technical advancement and uncertainties as well as providing a detailed breakdown of the eligible R&D costs.
HMRC provide a useful R&D tax relief guide for SMEs. It is recommended that a R&D tax specialist is used, especially for early year claims. Another option is to use a R&D tax claim portal such as Tax Cloud which will guide you through the R&D claim process and is fully supporting by R&D tax specialists.