R&D tax relief was introduced by the Government in order to reward companies for investing in innovation. Any company that carries out qualifying research and development (R&D) may be eligible for tax incentives through the R&D tax credit scheme.
In this article I’ll be shedding light on some of the facts you probably didn’t know about R&D Tax Credits. First, let’s take a quick look at what the scheme is and who can claim.
What exactly are R&D tax credits?
R&D tax credits enable businesses that invest in developing products, processes, software or services to receive a deduction from corporation tax or a cash payment from HMRC. The scheme was developed to incentivise UK businesses to invest in innovation through R&D activities.
Who can claim R&D tax credits?
Any company in any sector can claim for R&D tax credits. The key is that the company must be undertaking research and development activities that support advancement in science or technology. SMEs subcontracting out R&D work and SMEs carrying out R&D work for large companies also may be entitled.
Many companies don’t realise that they qualify for R&D Tax Credits or they are not claiming for their full entitlement. Businesses across the UK are losing out on significant sums (the average R&D Tax Credit claim for an SME is over £50,000 per year).
Here are some of the key facts you may not know about claiming for R&D tax credits.
There are two schemes
There are two routes for claiming R&D credits, depending on the size of your company and the funding for your R&D project. The small to medium-sized entity (SME) scheme is for businesses performing their own R&D with fewer than 500 staff and either:
- a turnover of less than €100 million
- gross assets (balance sheet) of less than €86 million
Companies with more than 500 staff can claim a Research and Development Expenditure Credit (RDEC). The Research & Development Expenditure Credit is available to companies who don’t meet the criteria of an SME. In addition, SME’s receiving a grant or subcontracted to by large or international companies fall under the RDEC scheme.
It’s a complex tax
One of the key reasons businesses either don’t bother to make a claim or submit claims that are unsuccessful is largely due to the complex nature of the R&D tax credit scheme.
Simon Bulteel, Director of specialist R&D tax firm, Cooden Tax Consulting, explains “there are over 500 pages of guidance for putting together an R&D tax credit claim. Writing the technical narrative is where most claims fall short. A poor technical narrative is likely to attract lengthy and expensive HMRC enquiries and is much more likely to result in a failed claim.”
Your normal accountant may not have the specialist expertise to help you make a successful R&D tax credit claim, but an R&D tax specialist can work alongside your existing accountant.
Qualifying criteria
In order to qualify for R&D Tax Relief your project must meet HMRC’s detailed criteria. This includes:
- trying to overcome technological or scientific uncertainty
- the knowledge of competent professionals engaged on the project
You can claim retrospectively
A business can make a claim for R&D tax relief going back 2 accounting years for qualifying expenditure identified during that period. For example, if your company’s year end is 31st December, you can submit a claim up to 31st December 2019 for the accounting period ending 31st December 2017.
You can claim retrospectively even if you have already filed your tax return. Simply submit an amendment to your CT600 within the appropriate time frame.
Reporting R&D qualifying expenditure
As above, all R&D tax credit claims are submitted through your corporation tax return, along with supporting information. You must enter your calculated R&D tax benefit onto form CT600. A common error picked up by HMRC is in the qualifying expenditure calculation.
Subcontracted R&D activities
You may still qualify for R&D tax credits if you subcontract your research and development work outside of your organisation. What’s more, the subcontracted activities don’t have to take place in the UK and the subcontractor doesn’t have to be based in the UK either. Of course, the other usual qualifying factors apply.
PAYE and NIC
You can still claim R&D tax credits even if you/your company doesn’t pay any PAYE and national insurance contributions, as long as you would otherwise qualify.
Other grants and subsidies
There is a common misconception that grants or other subsidies and R&D tax credits cannot be used together. That is not necessarily the case. However, the relationship between them is complex and you would be advised to seek specialist help in planning to optimise your use of both breaks.
Changing status from SME to large company
Obviously businesses grow. Businesses under SME status benefit from the R&D tax relief scheme most (they can claim up to 33 per cent on qualifying R&D expenditure, whereas the RDEC scheme for large organisations offers just 12 per cent on qualifying expense).
When SMEs grow to more than a 500 headcount, or exceed the €100 million turnover or €86 million gross assets limits, they can still claim under the SME scheme in the year of breach, if they still breach the criteria in the following year then they will be only eligible to claim under RDEC . It is known as the ‘year of grace.’ The only exception to this rule is when an SME is acquired by a large company or group. A change in status, in these cases, is applied from the beginning of the acquisition period.
Find out more about claiming corporation tax relief on your R&D project here.