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No matter how the Brexit negotiations turn out, successive Budgets and announcements from the government have been focused on helping companies innovate through research and development.

Launched in 2000, the research and development tax credits offer substantial relief to firms taking risks in innovation which they can receive as either a cash sum or as a reduction in their corporation tax.

In this article, Maple Accountancy explains what research and development tax credits are, how they may apply to your business, and how you can use our firm to help you claim them.

R&D tax credits – research and development definition

With any research and development work, there is risk involved. You might be attempting to create a new process, a new product, or a new service but there are significant “technological or scientific uncertainties” in the way of potential success.

Likewise, your company may want to change something about an existing process, an existing product, or an existing service. However, the way to do this may not be clear and it will require investment in research and development to navigate the many hurdles ahead of you to achieve a successful outcome.

With what you’re trying to create is brand new or an amendment to something that already exists, it would not be obvious to a professional in the field how to do what you’re trying to do. And despite your best efforts, the project may even turn out to be a failure.

Broadly speaking, if something your company is doing or is trying to do sounds like the situations we have just described, there is a strong possibility that the project will qualify for research and development tax credits.

Maple Accountancy notes – you can claim R&D tax credits on your company’s own projects as well as for work involving R&D given to you by another company or organisation.

R&D tax credits – claimable costs

You can claim R&D tax credits on the following costs associated when incurred by the project:

• capital expenditure
• electricity, gas, water, and fuel
• employee costs (those who have a contract of employment with you directly)
• materials (including consumable or transformable materials)
• clinical trial volunteer payments
• software
• staff providers (where the staff member is involved in the project)
• subcontracted expenditure related to the project (up to 65% where a subcontractor has no connection to your company and you are not jointly responsible how a connected party is treated)

You can’t claim on consultants, staff, directors, or agencies workers (where their employment contract is with another company or companies and these organisations are not subcontractors and they did not come to your company via a staff provider), any fees to recruitment consultants, and costs for telecommunication and data services.

R&D tax credits – who can claim?

The average successful claim for R&D tax credits if £54,214, as reported by Taxation magazine. In addition to your project being eligible for the scheme, your company must have fewer than 500 staff, turnover less than €100m or have less than €86m in gross assets.

R&D tax credits – examples

For a profitable company, here is an example of the type of saving that could be made…

[ezcol_1half style=”color:#272262″][/ezcol_1half] [ezcol_1half_end style=”color:#272262″]Amount[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Spend[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£200,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Tax Credit Enhancement[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£200,000 x 130% = £260,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Normal taxable profit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£500,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Normal corporation tax on taxable profit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£95,000 (19% of £500,000)[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Taxable profit minus R&D relief[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£500,000 – £260,000 = £240,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Revised taxable profit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£240,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Corporation tax on revised profits[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£45,600 (19% of £240,000)[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Total saving from R&D tax credit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£43,500 (£95,000 minus £46,500)[/ezcol_1half_end]

If a company is making a loss and it wants to carry that loss forward or backward, this is how it could use its R&D tax credit…

[ezcol_1half style=”color:#272262″][/ezcol_1half] [ezcol_1half_end style=”color:#272262″]Amount[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Spend[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£100,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Tax Credit Enhancement[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£100,000 x 130% = £130,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Normal taxable loss[/ezcol_1half] [ezcol_1half_end style=”color:#272262″] £100,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Trading loss less enhanced by R&D tax relief [/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£100,000 + £130,000 = £230,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Loss available to carry forward or back for CT[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£230,000[/ezcol_1half_end]

And for companies wishing to receive a cash tax credit, this is how they could use their R&D tax credit.

[ezcol_1half style=”color:#272262″][/ezcol_1half] [ezcol_1half_end style=”color:#272262″]Amount[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Spend[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£100,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R & D Tax Credit Enhancement[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£100,000 x 130% = £130,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Normal taxable profit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£50,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Trading loss after R&D tax relief[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£50,000 – £130,000 = -£80,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]R&D expenditure qualifying for conversion to credits[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£80,000[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Potential tax credit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£80,000 x 14.5% = £11,600[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Payable tax credit[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]£11,600[/ezcol_1half_end]

[ezcol_1half style=”color:#272262″]Losses to carry forward or back[/ezcol_1half] [ezcol_1half_end style=”color:#272262″]Nil[/ezcol_1half_end]

R&D tax credits – receiving the tax credit

If your business is profitable, the size of your corporation tax bill will be reduced. If you have already paid corporation tax, HMRC will send you a repayment.

If your plan is to carry forward or backward a loss, there is no payment however the loss will be included on future or revised corporation tax (CT600) forms.

If your intention is to receive a cash tax credit, HMRC pay it directly to your registered business account. Transfer of the money is normally within 6 weeks of your CT600 submission.

R&D tax credits – evidence

HMRC will need to understand the project your company has been working on. They’ll need to see evidence of expenditure on the project (including records of associated costs) and they’ll want to know how you arrived at your final R&D tax credit calculation.

R&D tax credits – starting the process

Maple Accountancy, established in 2013, is one of Britain’s fastest growing and most entrepreneurially minded accounting, bookkeeping, and business advice firms. Since opening our initial branch in Derby, we now have offices in Birmingham, Leeds, London, and Nottingham.

Have you tried our R&D Tax Relief Finder?

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