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.