Research and Development Tax Relief

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4 in 5 businesses that could be claiming R&D Tax Credits are not. This could be attributed to a lack of understanding among the small business community of which businesses are actually eligible for the relief.

Contrary to popular belief the HMRC Research and Development Tax Credit scheme, one of the most lucrative tax relief systems available to small business and is in place to encourage innovation here in the UK, is not just for technology-driven enterprises. In fact, relief is open to any business investing in innovation regardless of industry.

From catering to construction, small and large business alike can apply for and receive a credit if their relative project is eligible.

How the R&D tax credit claim works

In short, Research and Development Tax Credits work by allowing you to increase the amount of money you record as spent on your project by a certain percentage, thus reducing your profit (in some cases increasing a loss if your company has not made any profit). This action will reduce the amount of tax a business pays hence the relief.

The amount subject to increase (the amount of money you will record as higher) is referred to as qualifying expenditure. Currently, the rate at which qualifying expenditure is enhanced for small businesses is 230%.

Of course, the qualifying expenditure is only recorded as such when tax computations are being made. The amount is recorded as so that it does not affect your company’s performance records (balance sheet) e.g. the qualifying expenditure is only enhanced by the 230% when you come to do the company tax return to give an enhanced tax-deductible cost.

The result, as mentioned, will reduce the company corporation tax bill if the company is profitable, however, if the company has made a loss in that year it can elect to receive a cash credit. In that case HMRC pays cash into your account at a current rate of 14.5%.

Example of R&D Tax Relief Calculation

Here is a simple example of the R&D Tax Credit system in action using £100 of qualifying expenditure for a loss-making company:

  • Cost in your accounts:                                                                                     £100.00
  • Cost in your Corporation Tax return (£100 x 230%):                                  £230.00

Tax credit:

  • Company making a trading loss (£230 x 14.5%):                                        £33.35

This means for every £100 spent on R&D a company which has made a loss can receive £33.35 back in cash.

A profit-making company who’ve spent £100 on research and development will simply record the cost as £230 on their Corporation Tax return and receive a reduction in their owed tax liability as a result.

 Is your business eligible for R&D tax credits?

The department of HMRC responsible for R&D Tax Credits provides the following information about eligibility:

“Your company can only claim for R&D tax relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”

Put simply, if a business is taking a risk [spending money] attempting to create or develop an idea, product or service through its own research into something that is not simply to advance a method or product currently in place and used by them, then the business may be carrying out a qualifying activity thus eligible for R&D Tax Credits. 

Here are some examples of activities which have been successful in R&D Tax Credit applications: 

  • A new flavour in the snack industry
  • Changing the fermentation process in the brewing industry
  • Modifying the internal production process in the health and beauty industry
  • Modifying a car engine; this was undertaken by a construction company hence eligible as it was not deemed to simply be enhancing their own capability

Qualifying Expenditure: What costs can be claimed?  

The main examples of costs that can be listed as qualifying expenditure for R&D enhancement are:

  • Staff costs, including salaries, employer’s national insurance and pension contributions
  • Freelancers and subcontractors engaged in R&D projects
  • Relevant software used
  • Materials and consumables used in the R&D process. Namely heat, light and power

Because R&D claims often result in refunds, the claim should be as detailed as possible to avoid HMRC investigations. Each expenditure should ultimately be wholly and exclusively for use of the project if the entire amount is being claimed.

Assistance with Research and Development Tax Credits 

If you are embarking on a project to research and develop a product then you should always consult an experienced tax advisor to find out if you are eligible. If you are eligible you will need a knowledgeable accountant to ensure that your records are detailed enough to provide information on qualifying enhancement.

You should note that, if you have only recently come across the relief but have been working on an eligible project for a while, you are able to claim R&D tax relief for your last two completed accounting periods.

Cottons Chartered Accountants are experienced accountants and tax advisors. Our experienced partners lead teams capable of ensuring that our clients are always operating in the most tax efficient manner.

If you would like to know more about R&D Tax Credits and if your project is eligible then talk to us today. We have offices in LondonNorthampton, Daventry and Rugby and offer a full range of tax and accounting solutions for small businesses. We are also audit certified and can provide businesses with standard and specialist audit reports if required.