Can I claim a research and development tax credit?
posted 24th June 2021
Carrying out research and development activity can be an expensive part of developing your product/service and growing your business. So, finding a way to claim back tax against this expenditure is invaluable. HMRC have introduced research and development tax credits ("R&D tax credit") as a tool to encourage businesses to innovate by reducing costs to free up cash for growth investment.
Expenditure on your R&D tax credit can be claimed against tax at a rate of up to 230% of the actual costs for small to medium-sized enterprises (SMEs). If your company is loss-making (and therefore has no tax liability) then a payable tax credit can be claimed.
How does the R&D tax credit work in practice
Where you have qualifying expenditure that's been incurred on R&D tax credit projects, allowable costs are increased by an additional 130% for tax purposes. For every £10,000 spent, you can claim a a total tax deduction of £23,000. Or, at the current tax rate, £4,370.
R&D tax credit worked example
If your business is loss making, rather than carrying the tax relief forward, you can opt to surrender the amount for a payable tax credit of 14.5% of the loss. If you have spent £10,000 on qualifying expenditure that's a cash receipt of £3,335.
Is my company eligible for the relief?
To be eligible for the R&D tax credit tax relief for SMEs, your company must have:
- Less than 500 employees, and either
- Turnover below EUR100 million, or
- Assets below EUR86 million.
How does a project qualify for the R&D tax credit
The project you're working on must be more than just applying existing solutions to a routine problem. The BEIS guidelines say that, for tax purposes, an R&D tax credit project is one that "seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty". The knowledge being sought must not be already available in the public domain.
This definition of 'advancing knowledge in science or technology' is wide-ranging and has encompassed a range of projects including developing ways of artificially ageing materials to produce bespoke 'antique-looking' furniture, developing packaging to improve the shelf-life of perishable goods or creation of software for either sale or internal use. It's not just restricted to activities carried out by scientists in lab coats.
The guidelines include work on both products and services for sale and developing equipment and processes for internal use. It doesn't cover the cost of projects where you are carrying out R&D tax credit work as a chargeable service to your clients, as that is seen as just normal cost of sales.
The costs to use in calculating the claim include salaries of staff working on, or supporting, the project (pro rata, if not wholly involved). It also includes the associated employer National Insurance and pension contributions for these employees, plus the costs of software, materials consumed and an appropriate share of the utility bills. Where you subcontract part, or all, of the work to a third-party, 65% of those charges go into the calculations.
Sounds easy, why can't I apply for the R&D tax credit myself
To claim the allowance or payable tax credit you will need to provide a report explaining what scientific or technical uncertainty you were trying to overcome. You also need to explain how your project attempted to resolve it and why it couldn't be easily worked out by a professional working in the specific field or sector. NOTE: the project doesn't have to be successful to qualify for the relief. The report will need to explain:
- Show that a professional in the field could not work this out
You should explain why a professional could not easily work out your advance. You can do this by showing that other attempts to find a solution had failed. You can also show that the people working on your project are professionals in that field and get them to explain the uncertainties involved.
- There were advances in the field
Your project must aim to create an advance in the overall field, not just for your business. This means an advance cannot just be an existing technology that has been used for the first time in your sector. The process, product or service can still be an advance if it's been developed by another company but is not publicly known or available.
- Show there was uncertainty
A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done - even after referring to all available evidence. This means that your company or experts in the field cannot already know about the advance or the way you achieved it.
- Explain how you tried to overcome the uncertainty
You should show that the R&D needed research, testing and analysis to develop it. You need to be able to explain the work you did to overcome the uncertainty. This can be a simple description of the successes and failures you had during the project.
Do we need to send HMRC copies of invoices and/or any other documentation to support R&D tax credit claim
No. The report will have a detailed analysis of the claim. The only time HMRC will want to see invoices and documentation is if they open a tax enquiry into the claim.
Is this a tax avoidance scheme
No. HMRC are helpful and actively encourage a company to make a claim if they are incurring costs on innovative projects. So long as your project is for bona fide commercial reasons there will not be any issues.
Next steps
Talk to us about exploring the R&D tax credit allowances. It's possible that your company has been carrying out qualifying R&D tax credit work without even realising it. If you are, that's a substantial tax relief that could be lost. We'll be able to let you know if your R&D tax credit work is eligible and can help you to prepare the complex claims documentation.
