The government offer research and development (R&D) tax relief and credits for businesses working on innovative projects in science and technology.
In fact, the company itself doesn’t have to be specifically focused on that sector to benefit from the tax relief, but must demonstrate that it has invested resources in researching and developing a scientific or technological platform, product or service that will advance current understanding and benefit their business, industry or the wider population.
This handy guide offers a brief summary of what R&D credits are, how they work, how much they can be worth, what kind of expenditure is eligible and how to go about applying.
What are R&D tax credits?
R&D tax credits are a form of tax relief implemented by HMRC, which allow businesses to claim up to 33% of the expenses of an R&D project – even if it was not successful.
How do R&D tax credits work?
In order to receive R&D tax relief, the business in question must file an R&D claim within two financial years after the money was spent, equating to a maximum total of 36 months. The claim is then assessed by HMRC. If it meets the criteria and is accepted, you will usually receive the money within 2-8 weeks and it can be used on anything you like; fuelling further R&D projects, buying equipment, hiring employees or even paying dividends. If it is contested, you may be subject to an external review and audit and can potentially face fines for misfiling.
How much are R&D tax credits worth?
A business can claim and receive up to 33% of the costs of its R&D projects through R&D claims. This maximum threshold is only applicable to small- or medium-sized companies (SMEs) which are loss-making. For SME’s which are profitable, up to 25% of additional tax relief is available.
Larger companies, which are defined as having over 500 employees and a turnover of more than £100 million or a balance sheet of more than £86 million, can claim the relief under a different regime that operates at different rates.
What kind of expenditure is eligible for R&D claims?
It’s a difficult proposition to explain in a nutshell which kind of expenditure qualifies for R&D tax credits, since the heavily-detailed criteria which HMRC requires you need to meet can cause confusion. In a general sense, the funding must have been used to advance scientific or technological understanding in some way or for an innovative project that attempted to do something other competitors were not doing or could not do themselves.
Other than that, qualifying companies must be UK-based and must have spent the money on either staff wages, external contractors or subcontractors, materials consumed during the project or software licensing required for the project. The claim must also be filed within two financial years (up to 36 months) of the money being spent.
How to file an R&D claim
Filing an R&D claim can be a long and complex process which involves three key components: writing a technical narrative to demonstrate that your project complies with HMRC criteria, assembling and presenting the financial calculations necessary to work out how much you may be entitled to, and completing the necessary form for submission taking into account the new claim.
Of course, all of this can involve many hours of manpower and a significant amount of stress, which is why many businesses outsource the process of filing for R&D claims to their accountant or other service provider. At Profile, Chartered Accountants and Registered Auditors, we have over 16 years of experience in handling all aspects of business accounting and can provide info and insight on whether or not your business has a viable R&D claim, as well as handling all of the necessary paperwork and filing your claim for you.
To find out more about the subject and to enquire about how we can help you, send an email to [email protected] or give us a call on 020 8432 2289 and we’ll be happy to help.