Research and Development (R&D) Tax Credits
R&D Tax Credits are one of the government’s top incentives aimed at helping UK businesses by encouraging and rewarding innovation. These credits are available to companies engaged in research and development activity, regardless of their size.
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.
The activity must relate to your company’s trade - either an existing one, or one that you intend to start up based on the results of the R&D. You’ll need to demonstrate to HMRC that your activities are part of a specific project/programme that can make an advance in science or technology.
Unlike Asset Finance or Invoice Factoring, R&D Tax credits are not a short-term financing option for your business. As they are tax credits deducted from your corporation tax bill (as opposed to, grants or loans paid into your bank) they can only be claimed retrospectively, i.e. once the qualifying criteria have been met and a claim subsequently completed with HMRC.
That said, R&D tax credits ranging from £11.00 to £33.00 for every qualifying £100 spent by your company can be credited against your overall corporation tax bill. You can also backwards-claim for up to two years worth of activities.
Fortis Partnership are big fans of this scheme and we work with many clients that don’t see or realise the potential benefits of this government scheme, and we routinely bring up R&D Tax Credits in our conversations!
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)
subcontractors/freelancers
software license costs
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 ABOUT MY CURRENT PROFITABILITY?
R&D TAX CREDITS FOR A HIGH-PROFIT COMPANY
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 credits 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.
However, If the deduction is greater than the company’s profit for the same period, this creates a loss for corporation tax purposes.
R&D TAX CREDITS FOR A LOWER-PROFITS COMPANY
Where the R&D deduction is greater than the Company’s taxable profit for the relevant accounting period, the company 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
In other words, most companies making less profit than their R&D Tax Credits would reduce their Corporation Tax by won’t lose the benefit of those R&D Tax Credits.
HOW TO CLAIM R&D TAX CREDITS
R&D tax credit claims are monitored and processed by HMRC. One of the Fortis Partnership network specialists will help with this or you can do so yourself, though we would always strongly recommend that at least on a first claim you should get some expert guidance with the process.