R&D tax credits
In order to support companies that work on innovative projects in science and technology, the government offers research and development (R&D) tax credits. This means that eligible companies could receive large cash payments from HMRC or significant reductions in corporation tax. It can be claimed by a range of companies that seek to research or develop an advance in their field. You may think that you aren’t doing any R&D but you don’t need to be in a lab with test tubes or creating sophisticated robots to take advantage of this great scheme. If you’re developing new services, processes or products you might be eligible for R&D tax relief and “new” doesn’t necessarily mean wholly new, it could be an upgraded or enhanced version of something that already exists.
How R&D tax credits work
At the end of an accounting period where you think you’ve conducted R&D, you make a claim to HMRC to either reduce your corporation tax bill or give you a cash payment if there is no tax due. To claim, you’d separate out the R&D costs from other costs (this could include your salary if you are directly involved in the R&D) and the total figure would be the basis of the claim. Providing HMRC accept the claim, you’d get 130% of the total R&D cost in extra tax relief. The example below shows how this would work in practice:
If your business had a turnover of £150k, £25k of normal expenses and £25k of R&D related expenses, you’d be left with profit before tax of £100k giving you a £19k corporation tax bill. If you claimed R&D tax credits for the £25k of expenses and HMRC accepted, the £25k tax relief would grow to £57,500 and reduce the tax bill to £12,825. If your R&D spend was perhaps £50k, you would save over £12k in tax!
You have 2 years to make a claim so many companies making a claim for the first time, typically claim R&D tax relief for the last two completed accounting periods for an even more significant impact.
Who is eligible for R&D tax credits?
If you are taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be eligible to make a claim. Examples of eligible activities could be creating new services, processes or products or modifying existing services, processes or products to improve them. So, if there is a problem that you need to solve, there isn’t a known way to solve it and you either need to create a new way to solve it or modify a known method to solve it, there’s a good chance you’re conducting R&D. Any business in any industry could be conducting R&D so you don’t need to be a predominantly R&D focused business or in the science or technology industry to make a claim. It’s worth noting that you may also be able to make a claim if you’re conducting the R&D for your client rather than to solve your own problem.
For something to qualify as R&D, you need to be able to show to HMRC that you’ve set out to achieve something that either hasn’t been done before or has been done but the knowledge of how to do it isn’t available. Due to the unpredictable nature of R&D, you do not have to achieve what you set out to, in order to qualify so unsuccessful projects could still be eligible for a claim.
What to do if you think you are eligible
If you think you might be eligible then the first thing to do is to contact your accountant as they should have at least a basic understanding of R&D tax credits and should be able to recommend whether or not to pursue a claim. If you’re with a large firm of accountants, they might have the capacity to attempt the claim themselves but most will recommend a specialist that deals with R&D all the time. We send our clients to a great Bristol-based R+D specialist as they have a very high success rate and have a great fee structure that ensures they try to get the best claim for you and if HMRC rejects the claim, it won’t cost you anything.