Cash flow management is crucial during this challenging time; if your business incurs R&D expenditure, you may be able to reduce your corporate tax bill.
R&D tax credits allow eligible small and medium-sized enterprises (SME), both profitable and loss-making, to claim up to 33% of qualifying R&D expenditure.
In our latest blog, we outline the application process, eligibility criteria and reveal some useful hints and tips for submitting a successful application.
Estimated reading time: 4 minutes
What are R&D Tax Credits
R&D tax credits are a valuable source of funds designed to reward UK companies for investing in innovation, facilitating job creation, and driving growth.
The credits can be a beneficial injection of funds and act as a catalyst to accelerate a companies’ R&D capabilities.
HMRC is responsible for administering and processing R&D tax credits claims through the Corporation Tax system.
What types of activities count as R&D?
R&D for tax purposes is much broader than one may initially realise, and some day-to-day activities may qualify for tax relief, for example:
- Statistical modelling and programming
- Responsive web apps
- Legacy migration
- Development of applications for existing drugs or medical devices
- Design and development of new machine prototypes
- Establishing new manufacturing processes
- Advances in engineering to develop new or unique materials
- Product development using computer-aided tools
- Streamlining manufacturing processes through automation
- Elimination of allergens, preservatives, or artificial dyes in foods
Additionally, UK R&D tax incentives are not restricted to traditional industries that have high R&D costs, such as biotechnology, software, or life sciences. The support is also available to other sectors, including most technology companies, financial services, process engineering and manufacturing, construction, and civil engineering.
There are two different initiatives
The type of R&D tax relief applicable will vary, depending on the size of the business and whether it is classified as a small and medium-sized enterprise (SME) or large organisation.
Small and medium-sized enterprises (SME) R&D Tax Relief
For a business to claim under this scheme, it must have:
- Less than 500 employees
- And/either an annual turnover of less than €100 million or a balance sheet of less than €86 million.
Further eligibility criteria for the SME R&D Tax Relief also applies:
- The company must be within the jurisdiction of UK corporation tax.
- It must be a going concern.
- The company must be an SME, as defined by the requirements mentioned above.
- It must trade in the sector to which the qualifying R&D expenditure relates.
- The R&D project(s) must not have been contracted to the company.
- Expenditure is revenue in nature for tax purposes and deductible in the period.
- No grants or subsidies contribute to the expenditure.
If the company generates a profit, it could claim up to 26p in every £1 of qualifying expenditure.
If an SME operates as a loss-making entity, it may be eligible to claim back up to 33p for every £1 of qualifying expenditure.
Research and Development Expenditure Credit (RDEC) (large companies)
Any company that does not fit the SME definition above is classified as a Large Company.
This scheme returns:
- up to 8.8p for every £1 of qualifying expenditure before 1 January 2018
- 7p for every £1 of qualifying expenditure between 1 January 2018 and 31 March 2020
- 53p for every £1 of qualifying expenditure from 1 April 2020.
What eligibility criteria must the project meet?
For the receipt of R&D Tax Credits, a project needs to meet the following criteria:
- HMRC stipulates that qualifying R&D expenditure can be any project that “creates or modifies” a new and/or existing product, process or service which ”resolves scientific or technological uncertainties”.
- Any such R&D project, as defined by the criteria above, must be seeking an advancement in a field of science or technology that is not already common practise or known by professionals within the sector. It must also endeavour to extend the overall knowledge or capability at a broader level.
How to make an R&D Tax Relief claim
Typically, R&D Tax Relief claims are filed with HMRC at the end of the accounting period. However, companies have two years from the end of the accounting period to submit one.
The claim process consists of several steps:
Firstly, an initial assessment is undertaken to determine whether the proposed project meets all the relevant qualifications and eligibility criteria.
Secondly, all technical and financial information relating to the eligible projects needs to be collected.
Then there is the preparation of the claim documentation which should include:
- How the project will create an advance in the field
- How the issue could not be solved by a professional in the field
- How the project faces some degree of uncertainty
- How the business attempted to overcome the uncertainty
Finally, a comprehensive review of the claim will need to be undertaken and the claim pack submitted.
Top tips to achieve a successful claim
To make the process as stress-free as possible, here are some top tips for making that all-important R&D claim.
- Although you do not need to find a specialist, this is an area where significant value can be added to enhance the quality of your application.
- There should be a particular focus on the advances being made, uncertainties faced and an adequate breakdown of the qualifying expenses.
- Provide as many technical details as possible to ensure the claim is robust to stand up against close HMRC scrutiny.
- Prevent significant delays by submitting the correct qualifying costs.
- R&D tax credit claims can be made by businesses across a range of sectors, so it is prudent to review all aspects of business activity (such as project start and end dates, employee timesheets and details of any subcontracted R&D or agency staff brought in to help) to take full advantage of R&D tax credits.
Claims can be made up to two years after the end of the accounting period that the claim relates. For claims covering 12 months or more, separate claims for each accounting period must be made.
However, businesses should aim to make an R&D Tax Relief claim early into their new financial year, as this allows the business to benefit from their claim much earlier.
How long does it take to receive R&D tax relief?
HMRC aims to deal with 95% of payable tax credit claims within 28 days of submission.
It is often a time-consuming and complicated task navigating the R&D tax incentives application process, which is why having a dedicated R&D incentives team to steer the business’ submission can pay for itself in tax relief.
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