Research and Development Tax Credit rewards businesses who are coming up with innovative new solutions, products, services, and processes, and can help businesses save hundreds of thousands of pounds in R&D tax relief.
The UK government offers tax relief on Research and Development projects to reward companies for innovation. Many businesses are eligible for R&D tax credits but don’t even realise, so are losing out on possible savings, and others aren’t sure if their project qualifies. The reality is that R&D tax credits are far more widely applicable than many believe, and when secured through the right guidance, they can be incredibly valuable to UK businesses who are investing in research and development.
Background on R&D tax credits
R&D tax credits were introduced in 2000 by the UK government as an incentive to encourage businesses to invest more in R&D. They are available to small and medium-sized enterprises (SMEs), and a separate scheme is offered to larger companies. The scheme reduces the amount of tax liable on any profits directly relating to R&D projects.
Companies can reduce their tax bill or claim back cash credits as a proportion of their R&D expenditure. Most businesses that are carrying out R&D are likely to qualify and the criteria for eligibility are reasonably broad. Activities that are eligible for R&D tax relief often take place across a wide range of company operations and sectors.
The UK government introduced the tax incentive to try to encourage more businesses to invest in research and development, which would help to increase innovation and fuel the economy. Many countries around the world offer similar schemes to promote R&D investment.
Why are businesses missing out on R&D tax relief?
An estimated two-thirds of eligible companies have never made an R&D tax relief claim. This is due to the fact that there is a lot of confusion and misunderstanding surrounding who can apply for R&D tax credits. Below we have listed some of the top assumptions that stop companies who are eligible, from applying.
Only large companies can apply
This is simply not true. R&D tax relief is available to companies of all sizes, both small and large. It can, in some cases, be more beneficial to small and medium-sized enterprises, so it is worth looking into no matter the size of your company. SMEs, which are companies with fewer than 500 staff and a turnover of under €100 million or a balance sheet total under €86 million, can apply for R&D tax credits through the SME R&D Tax Credit scheme. Large companies can use the Research and Development Expenditure Credit (RDEC).
Only scientific or high-tech product development projects are applicable
This is a very common assumption, that only scientific projects can apply, but it is completely wrong. R&D tax credits are often overlooked by businesses that assume they have to have an on-site laboratory or be involved in a significant scientific research breakthrough in order to claim for R&D relief.
To qualify for R&D tax credits, it is stated that you must have undertaken a collection of activities aimed at overcoming a scientific uncertainty that could not be easily deduced by a competent professional in that field. Many people are put off by the word ‘scientific’, but it is used in a literal sense, it really means that you have tried to do something that hasn’t been done before. This innovation can come in many forms across a wide range of sectors, and it doesn’t need to be successful to qualify.
The scheme is not just restricted to product development either it encompasses the development of processes, services, and solutions. You do not need to have developed something completely new either you can improve upon an existing product, process, or service to make it better.
The criteria have been kept wide on purpose. Businesses that are trying to resolve scientific or technological uncertainties qualify for R&D tax credits.
You can only claim if you were successful and made a profit
Your project does not necessarily have to have been successful to qualify for R&D tax relief. Claims can be made for projects, successful or not, two years from the end of the tax year in which the work took place. R&D tax credits can reduce the amount of tax you need to pay on profits made, but if your company has made a loss they can be claimed as a cash sum reimbursement from the HMRC.
The claim is not valid if a competitor has already overcome the problem
If a solution is reached by a company’s competitor or another company in a different sector, but the method or process is unknown, unsuitable for your company’s product or protected by patent, then your activities can still be eligible. If it has been developed by another company but is not publicly known or available to you then your product, process, or service is still an advance in research and development. Research and development which is carried out using existing technologies that were designed to overcome issues and applying them in a different way, or to make a solution clearer, can also be eligible.
Human resource costs claimable are just a small proportion
This can be true in some cases, but it is usually the case that a much larger proportion of the projects human resource activity is eligible for tax relief. Human resource costs that qualify include:
- Staff costs – salaries, pensions, bonuses, employers NIC, and reimbursed expenses.
- Subcontracted staff and freelance staff costs.
- Payments made to people involved in clinical trials.
Other points to consider before you claim for R&D tax credits
Before submitting your claim for R&D tax credits, there are just a few more points that need consideration.
Proving the project is within the tax definitions
When submitting your claim, you need to reflect on what scientific or technological advance is being pursued, rather than just focusing on what you are developing. The focus should be on your aims of advancement and how your product will do this. A commercially innovative product is not enough, it needs to be attempting to make an advance.
A company must also prove there was scientific or technological uncertainty. Uncertainty exists when knowledge of whether something is possible or technologically feasible, or how you can achieve this, is not readily available or cannot be deduced by a professional working in that field.
Start and end dates for the R&D activity
The R&D activity starts when a company discovers an uncertainty and begins to work on a way to resolve it. The company first needs to identify the technical issues that need resolving and then make sure there is not already a solution available. The R&D activity ends when the uncertainty is solved, or the company stops working on it.
What costs qualify when claiming R&D tax credits?
Several day-to-day operational costs qualify for R&D tax relief. These include:
- Staff costs – wages, bonuses, pensions, employment tax, and reimbursed expenses of staff involved in the project.
- Software – any software needed for R&D or involved in R&D activities can be included if it was purchased or developed for the R&D project.
- Consumables and materials – any materials or resources which are used up/consumed in your R&D process, this can include things such as water, power, and fuel.
- Subcontracted R&D- even if some of your R&D project was outsourced to a different company, you can include this in your claim (this is at a reduced rate).
Some costs which do not qualify include:
- The cost of producing and distributing goods or services.
- The cost of land.
- Capital expenditure.
- The cost of creating patents and trademarks for your completed product.
When can you make an R&D tax claim?
A company can make an R&D tax relief claim anywhere up to 2 years after the end of the tax period it relates to.
How to claim for R&D tax credits
The best way to ensure your R&D claim is successful, and you get every penny you are eligible for, is to consult an expert. The claims process is complex and can be confusing for those who do not have the knowledge or experience of it or the HMRC rules and legislation.
Maple has a team of in-house R&D experts who have years of experience helping businesses of all sizes claim for R&D tax credits. We do all the hard work for you.
Contact Maple Accountancy today to find out if your company activity is eligible for R&D tax credits. We will be able to review your project and tell you whether you qualify, and if so, how much you will be able to save. We can then handle your claim for you, fill in in all the appropriate forms, complete the calculations, and even submit the claim and communicate with HMRC for you. It costs nothing upfront to start your claim or check your eligibility with Maple. Our experts can provide a free R&D analysis and will be more than happy to discuss your situation and provide any further help or advice.