R & D tax credits

R&D tax credits can be an invaluable financial boost to any company. There are many, many companies that are not aware of what they can claim.

What are R&D tax credits?

The Government introduced Research and Development (R&D) tax relief and tax credits for SMEs in April 2000 and for large companies one year later;

R&D Tax Credits apply to limited companies and can be offset against Corporation Tax. Where there are no profits, a cash credit is available – all subject to meeting qualifying conditions;

Since April 2015, qualifying expenditure is at 230% of value for corporation Tax computations;

Prior to 9th December 2009 an SME had to own the resulting intellectual property of R&D in order to qualify. From that date this condition no longer applies;

Qualifying costs can be internal labour costs. They can also be a proportion of sub contracted R&D work. Likewise they can be the cost of qualifying direct consumables and hardware;

You must make your claim within two years of the financial year end in which you incur the cost. This is unless you have capitalised and then written-off the costs later. In that case you must make the claim within two years of the year end when you write-off the costs.

Claiming for R&D tax credits

Many SMEs are under-claiming or NOT Claiming. Usually the critical factor for a small business is understanding the scope of what you can claim. The next problem is then writing a technical justification to support their claim for R&D Tax Credits.  Some misunderstanding includes that you cannot claim for work done for your clients. Another is that you cannot claim for work undertaken by sub-contractors.  Neither is accurate. You can claim for work done for clients as long as it meets the R&D qualification criteria. You must also have held the risk as to whether you would achieve the desired outcome. Businesses can claim for work contracted out within the UK or abroad. Again this is providing that you hold the risk (note the claim rate is 65% of costs for sub-contracted work).

R&D can include advances in science and technology to do things like….

  • Create a new product or improve an existing product
  • Develop a new service or improve an existing service
  • Design a new business process such as to improve organisational efficiency

This could be a new handle or a better lock or a more efficient cleaning process, so long as you use science or technology in an innovative way.  It can also include things like using science or technology in innovative ways to make better pies or bread.

If you seek help or advice from a specialist you are likely to increase the value of your claim as evidence seems to suggest that many small companies under-claim or worse still don’t claim at all because they have difficulty interpreting and applying the guidelines.

Questions to ask

If you are the owner of an SME and you want to work out if there may be qualifying R&D being undertaken, look back on the last three years and ask yourself these questions:

  1. Has the company created any new or enhanced any existing products?
  2. Has the company undertaken any work to improve processes?
  3. For service organisations, have any projects been undertaken to improve those services in order to either:
  • reduce costs,
  • win more business or
  • improve service levels?

If your answer to any of the above questions is yes we recommend you talk to a specialist to check out whether the company may qualify for R&D tax credits. Or if you are an accountancy practise request a workshop – at our workshops we go into more detail on what qualifies as R&D for tax purposes, so you are better able to recognise when R&D is being carried out by your clients.

There are many organisations that can help with your R&D tax credit claim, one very good one I have used is www.randdtax.co.uk. who supplied much of the information given here.

HMRC have done a short video, encouraging small businesses to apply for R&D tax credits. https://www.youtube.com/watch?v=SjV1EG5il5Y

We can readily help with identifying whether you might be able to make a claim for R&D tax credits, and through the process itself. Please call or email and one of our experts can discuss it with you.

Further Resources