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R&D tax credits: Conditions and how to claim

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25th May 2012
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A small or medium-sized company that has yet to make a profit may be able to claim a tax credit for research and development (R&D), explains Robert Leach.

A company that is already making a profit can claim the more generous relief as a deduction from its corporation tax bill. There is a separate scheme for large companies.

About 6,500 small or medium-sized companies claim either the enhanced relief or tax credits for R&D. The CBI found that 37% of these companies increased their spending on R&D as a consequence.

Despite these figures, the Treasury believes that R&D reliefs are being under-utilised. It therefore plans to introduce a new above-the-line credit, possibly in 2013. At the moment this is planned only for larger companies.

In addition, it should also be realised that all companies will be able to reduce their corporation tax rate by using the “patent box” from 2013. This charges a lower rate of tax on income from exploiting a patent. It is being phased in over four years, and will lead to an effective rate of tax of 10% by 2017.

Conditions

In terms of making a claim, the first condition to be met is that you must be a company paying corporation tax. The R & D tax credit cannot be claimed by a sole trader, partnership or other body that does not pay corporation tax.

Second, the company must be a going concern and the latest accounts must have been prepared under the going concern basis. They must not indicate anything that could call into question its ability to continue in business. This means that a company must not depend on getting R&D tax credits to survive.

Third, a claim may only be claimed for revenue expenditure, such as for premises costs and wages. Any capital expenditure may not be included, though there is a separate capital allowance for R&D.

What is included

R&D revenue expenditure includes:

  • cost of employing staff directly
  • paying an agency or other staff provider for workers directly engaged in R&D activity. This provision has now been extended to allow for cases when additional parties provide workers
  • consumable and transformable materials used directly in R&D work
  • power, water, fuel and computer software used in carrying out R&D

A basic definition of R&D is “work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology”. This can include new or improved products, services or processes.

Calculation

R&D credits may be claimed in respect of any sum. There was a minimum limit of £10,000 before 1 April 2012, but that limit has now gone. The maximum that may be claimed is €7.5m for any one project. This maximum may be further restricted if your company has received any other form of state subsidy or grant.

R&D tax credits are paid as a cash sum by HMRC. There were conditions related to how much tax and national insurance the company paid, but those conditions have now also been removed.

The amount of tax credit is calculated as a percentage of enhanced R&D spending.

From 1 April 2012, the enhancement is 125% of expenditure, provided the company has made sufficient trading loss. This means that for actual R&D spending of £10,000, the enhanced spending is up to £22,500. It has been enhanced by £12,500.

The rate of tax credit is (from 1 April 2012) 11% of this figure. In this example, the figure is £2,475. This is 24.75% of the total spending.

How to claim

A claim must be made within two years of the end of the accounting period in which the expenditure was incurred.

The claim is made by:

  • putting an X in Box 99 of the corporation tax return (to claim the R&D allowance)
  • completing boxes 87, 89 and 143 on the return (to convert the allowance into a tax credit)

It is also necessary to put an X in the box for repayment claim on page 1.

It is not, strictly a legal requirement, but HMRC suggests that companies send a covering letter saying why the company considers its research and development is eligible for tax relief, and how the figures in the return have been calculated.

HMRC has various specialists to determine whether work qualifies as R&D.

Replies (21)

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By tonyglasbey
26th Jun 2012 12:23

R & D claims

Thanks for the article. I'm engaged in my first such claim and found the content very useful.

I am amazed that there have been no posts on this subject. Either you (Robert) explained it so well that the need for clarification is obviated or it's an indication of how little R&D is going off that accountants are having to deal with.  The latter wouldn't bode well for long term economic recovery.

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By merlyn
13th Jul 2012 08:14

Sadly it's the latter

I've been doing R&D claims for clients over the past few years and the one thing I keep hearing is "Why hasn't our accountant told us about this before?" 

The answer tends to be that either their accountant doesn't know much about R&D tax relief and even those who do tend not to understand what actually qualifies as R&D, so don't bother mentioning it to their client.

I tend to focus mostly on the technical side for clients (what qualifies ? what costs can I include? etc) and let their accountant actually submit the claim but even then a lot struggle with how to fill in a CT600 to include the figures.

The Manufacturer did quite a good article on R&D and they estimated only 3% of smes in manufacturing actually claim, if that is the case then the country may be in trouble.

http://www.themanufacturer.com/articles/just-3-of-manufacturing-smes-claim-rd-tax-credit-relief/

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Replying to carlh:
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By emmapop
28th Feb 2014 11:41

Would anyone have a cost schedule template that I could use to submit with the Write-up? 

What do they want to see with regards to the breakdown of the claim?

Any help would be great! 

Thanks, 

Emma

 

 

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By Suntree
23rd Jul 2012 18:50

contracted out R&D

Does expenditure on contracted out  R&D  (s1053) qualifies for tax credits, and how credits are given?

 

Thank you in advance for comments on this topic.

 

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Replying to Marion Hayes:
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By merlyn
23rd Jul 2012 19:00

If you are an SME, then put simply yes, but there are some rules regarding your relationship with the sub-contractor.

The credits can either be a loss to be carried forward against future corporation tax liabilities or as a refund paid directly into your bank account, or a cheque.

This will all depend on your personal circumstances though.

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By Suntree
23rd Jul 2012 19:30

Contracted out

Thanks a lot for advice.

Yes my client is SME and is not connected to contractor. 

 I am a bit confused on a rate though. For loss C/f rate is 65 % (s 1136) additional relief, however for repayable credits (s1055) it refers to 200%, and I cannot find anywhere reference to the contrary. 

 Logically credits should be calculated on relievable expenditure which is 165%, however I might be wrong. 

 

 

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By merlyn
24th Jul 2012 19:06

I'll try to clarify.

 

If you had say 100k of internal staff costs you can qualify as R&D expenditure and 100k of subcontractor costs.

The internal staff costs can be claimed at 100% and the subcontractor costs at 65%, giving you a total  qualifying expenditure of £165k.

Depending on the period in question you can then uplift that by 75%, 100%, or 125%.

So assuming it's for a period from 1st April 2011 and 31st March 2012 then the uplift would be 100% and your uplifted figure would be £330k.

 

 

 

 

Thanks (1)
Replying to HumanShale2:
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By Suntree
24th Jul 2012 20:54

Thank you

[quote=merlyn]

I'll try to clarify.

 

If you had say 100k of internal staff costs you can qualify as R&D expenditure and 100k of subcontractor costs.

The internal staff costs can be claimed at 100% and the subcontractor costs at 65%, giving you a total  qualifying expenditure of £165k.

Depending on the period in question you can then uplift that by 75%, 100%, or 125%.

So assuming it's for a period from 1st April 2011 and 31st March 2012 then the uplift would be 100% and your uplifted figure would be £330k.

 

 

 

 

 Thank you for taking time to clarify. It has been a big help. 

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By merlyn
25th Jul 2012 19:20

No problem at all.

My firm offer advice to clients looking to claim R&D tax relief, so if you have any other questions more than happy to answer them.

Cheers

Paul

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By stek2013
30th Nov 2013 11:26

Sole director company.. claiming R&D time?

Anyone have any thoughts on whether I (a sole director ltd company) could claim R&D relief on research work?

I'm in the process of launching a new software product - as such nearly 2 years of research has gone into the making of it to date, with a lot more internal development work starting to stack up.

While the software platform will eventually form the basis of a new revenue stream it wont actually ever be paid for at anything like the development effort, let alone the R&D, that has gone into it.

Detailed records & timesheets have been kept throughout purely as I record all my time to see where my efforts are going - but wondering if a hourly rate could be applied to this and some tax relief claimed.

The business is a going concern and profitable so we certainly meet that criteria. Appreciate any input.

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By Simon@CoodenConsulting
08th Mar 2014 06:43

Cost Schedule Template...

The best cost schedule template is simply from HMRC's website and the R&D pages, it lists the costs that are eligible. My template matches that. I would suggest it is beneficial to add a summary of the wages and salaries and the details of the apportionment of each employee's time involved in the R&D projects as you will need the total of R&D wages and salaries as a means of apportioning software and utility costs. Normally I would add a breakdown of the costs per project! Would be happy to help.

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By razvan786
21st Jun 2016 14:14

R&D claims

Very helpful article.

Can you explain if R&D only applies to manufacturing or can a Food, Drink and Tobacco wholesaler like our company that invests in new technology to develop its buying & selling processes qualify for R&D ?

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Replying to razvan786:
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By merlyn
22nd Jun 2016 13:19

R&D can apply to any company subject to Corporation Tax (so limited, PLC etc.).

So can apply to a variety of industries and a number of the companies we have helped claim R&D tax relief are in sectors not traditionaly associated with R&D, but as they have undertaken projects such as software development to support their back off, they have been able to make a successful claim.

HMRC have now started the advanced assurance scheme where you can fill in their online form and then an inspector will contact you to discuss if your project(s) would qualify and if so they will pre-approve your claim. There are of course some caveats in terms of turnover and number of staff, but is worth a look in the first instance.

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By DorotaT
29th Aug 2016 15:50

Do the costs incurred on Maintenance &Support for software programs used by R&D teams qualify for R&D tax relief?

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Replying to DorotaT:
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By dwgw
30th Sep 2016 12:12

It would need to be project-specific, rather than a cost attributable to generic R&D. Subject to that it could be a qualifying indirect activity.

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By GeeVee
21st Sep 2016 09:56

I am trawling through the HMRC website, surprisingly with little joy. I have noticed that there are 2 rates to enhance expenditure, 130% and 230%. Does anybody know the criteria for each rate please? I have a client who may have small amount of qualifying expenditure and 230% would make it a viable claim!

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Replying to GeeVee:
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By DorotaT
21st Sep 2016 10:10

130% rates applies to Large company scheme
230% rate applies to SME scheme
Please refer to the HMRC website on the criteria of eligibility for each of these schemes.
Also note that there are few exemptions: for example projects for external clients done by SME and projects you have received notified state aid for can only qualify under LC scheme.
Hope this helps.

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Replying to DorotaT:
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By DorotaT
21st Sep 2016 10:13

Also check out this blog http://granttree.co.uk/tax_credits/
I used it for writing the report http://granttree.co.uk/how-to-nail-the-technical-narrative-in-an-rd-tax/
but it is full of advice how to go around making and R&D claim.

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Replying to GeeVee:
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By DorotaT
21st Sep 2016 10:10

130% rates applies to Large company scheme
230% rate applies to SME scheme
Please refer to the HMRC website on the criteria of eligibility for each of these schemes.
Also note that there are few exemptions: for example projects for external clients done by SME and projects you have received notified state aid for can only qualify under LC scheme.
Hope this helps.

Thanks (1)
Replying to GeeVee:
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By merlyn
30th Sep 2016 12:28

Those are the SME and large company rates (since replaced with the ATL tax credit).

For the 230% SME rate a company must have less than 100 million euro turnover, less than 500 employees and less than then 86 million euros on the balance sheet.

The info is available here
https://www.gov.uk/guidance/corporation-tax-research-and-development-tax...

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