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Research and Development Tax Credits

Research and Development (R&D) tax credits are a handy little tax relief that rewards businesses in the UK for investing in innovation.

If your company is involved in projects aiming for an advancement in science and technology, taking advantage of this relief could cut down your corporation tax bill by tens or even hundreds of thousands of pounds.

What are R&D tax credits?

R&D tax credits are a government tax relief which gives companies that spend money on developing new products, processes, or services, or on enhancing existing ones, either a cash payment or a reduction on their Corporation Tax bill.

These R&D tax credits can be used as an alternative to grants for research and development funding, or even sometimes in addition to outside finance. It can also be claimed on unsuccessful projects.

The rates are the equivalent of up to 33p for every £1 of qualifying expenditure, so it really is worth applying if you fall into this category.

However, in order to claim for this generous relief on innovative projects, you’ll need to meet the government’s own definition of what counts as R&D.

Does my project count as R&D?

For your work to qualify for R&D relief, it needs to be part of a specific project designed to make advancements in a given field. This will also need to be in science or technology – areas like social science like economics or theoretical fields like maths will not count.

In any case, the project must also be related to your company’s trade – either your existing one, or one you plan on starting based on the results of your R&D.

To qualify for R&D tax credits, you’ll need to explain how your project:

  • Looked for an advance in science and technology

This must be an advancement in the overall field, not just for your business. That means your advancement can’t just be for existing technology being used for the first time in your sector – it must be new.

  • Had to overcome uncertainty

The thing your company is researching or developing can’t be known to be scientifically or technologically feasible when you make or discover it.

Essentially, this means experts in the field can’t already know about the advance or how you achieved it.

  • Tried to overcome this uncertainty

You should be able to show that the R&D required research, testing and analysis in order to be developed.

You’ll be able to explain what it is you did to overcome this uncertainty, such as a small description of the successes and failures you experienced throughout the project.

  • Couldn’t be easily worked out by a professional in the field

You will also need to explain why your R&D was worth it by saying why a professional in the field couldn’t easily solve the problem themselves

This could be as simple as showing that other attempts to find a solution had failed, and that the people working on your project were professionals that had uncertainties to figure out to reach the advancement.

Types of R&D relief

The type of R&D relief you claim will depend on the size of your company and whether or not the project was subcontracted to you.

  1. SME R&D Relief

Small and medium sized enterprises (SMEs) can claim SME R&D relief on their projects, allowing them to:

  • Deduct an extra 130% of their qualifying costs from their yearly profit before working out tax (in addition to the normal 100% deduction); and
  • Claim tax credits if the company is loss making, worth up to 14.5% of the surrenderable loss.

If you’re making your first R&D claim, you may also qualify for Advance Assurance. If granted, this means all R&D claims you make in the first 3 accounting periods will be accepted as long as they fit the agreed criteria.

You can claim for this relief if you’re an SME with less than 500 staff and a turnover of under €100m (or a balance sheet total under €86m). Please note that if you have external investors, your SME status might be affected.

With SME R&D relief, you can claim:

  • Staff costs such as wages, Class 1 NICs, and pension fund contributions.
  • Sub-contractor costs (of which you can claim up to 65% of the cost for your relevant R&D activities).
  • Consumable items used up in the R&D like materials and utilities.

You will not, however, be able to claim for any capital expenditure, rent, business rates, production or distribution fees, or the cost of lands, patents or trademarks.

  1. Research and Development Expenditure Credit

If you have a large company that does not fall under the SME R&D relief criteria, you can claim a Research and Development Expenditure Credit (RDEC) on your R&D projects instead.

You may also wish to claim a RDEC if you are an SME that has been subcontracted to carry out R&D work by a larger firm.

The RDEC is a tax credit for your qualifying expenditure, worth 12% as of January 2018.

How much could you save?

The exact amount of R&D tax credits your company could receive will all depend on the financial position of your company and how much you spend on R&D each year.

Say you run a profit-making business spending roughly £250,000 on R&D each year. We estimate that you could receive up to £61,750 per year in tax refunds or reduced tax liability.

If your company was loss-making and spending the same £250,000 on R&D, this figure would go up to around £83,375 in tax credits.

Of course, the more you spend, the more tax relief, refunds, and credits you will be entitled to.

How are my R&D tax credits calculated?

The Government rewards companies for their investment in R&D by applying a 130% enhancement rate on the amount they spend.

So, back to the profit-making firm investing £250,000 in R&D each year, the calculation would look something like this:

£250,000 x 130% (enhancement rate) = £325,000

x 19% (Corporation Tax rate) = £61,750 as a tax refund or reduced tax liability

Your R&D tax credits will always come to 25% of your initial investment. However, if you were a loss-making company, you would also receive the ‘surrender rate’ on top of your tax credit; bringing your total credit to 33.35% of your investment. That would go as follows:

£250,000 x 130% (enhancement rate) = £325,000

£250,000 + £325,000 (enhancement) = £575,000 (enhanced expenditure)

£575,000 x 14.5% (surrender rate) = £83,375 as a tax credit

How to claim R&D relief

You can make your claim for R&D tax credits and relief up to two years after the end of the tax year in which it ended. All you need to do is enter your enhanced expenditure into the full Company Tax Return form (CT600).

To work out your enhanced expenditure, you will need to:

  1. Calculate the costs that were directly attributable to R&D.
  2. Reduce any subcontractor or external staff payments to 65% of the original cost.
  3. Add all costs together.
  4. Multiply the figure by 130% to get the additional deduction to put in to your tax computations.
  5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.

And, if you make a trading loss, you can also choose to surrender this to claim a tax credit.

Let us help

Whilst R&D tax relief can result in a huge reduction on your tax bill and leave extra money in your bank, the process is far from simple. We can give you all the professional advice and guidance you need. From working out your enhanced expenditure to supporting your claim on your tax return – we’re here to help.

Speak to your TWP accountant today on 01932 704700 to discuss how we can help you.

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