Research and Development Tax Credits are a tax incentive to encourage UK companies to invest in R&D.
It is estimated by HMRC that more than £84 billion of R&D tax credits have not been claimed. It is estimated that 80% of eligible companies have either not claimed or have under claimed.
There are two types of relief, we will focus on the relief available for small and medium sized enterprises (SME). Defined as:
Less than 500 staff
A turnover of under 100 million euros or balance sheet total under 86 million euros
The SME R&D relief allows companies to:
Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction, or;
Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
If the company is making profit then it will save additional corporation tax on 130% of the R&D costs. Therefore if a company has £100,000 or R&D costs, these will be uplifted to £130,000 and then corporation tax saved at 19%, giving an additional corporation tax saving of £24,700.
If the company is making a loss, it can chose to carry this forward to offset against future profits and save tax at the corporation tax rate (currently 19%). It it can chose to obtain a cash payment by HMRC by surrendering some of the tax saving.
The cash payment is paid at 14.5%, whereas offsetting against profits saves 19%. Deciding whether to take the 14.5% cash, or 19% tax saving will depend on the future profit and cashflow of the business.
Projects that count as R&D
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology.
The project must relate to your company’s trade, either an existing one, or one that you intend to start up based on the results of the R&D.
To get R&D relief you need to explain how a project:
Looked for an advance in science and technology
Had to overcome scientific or technological uncertainty
Tried to overcome this uncertainty
Could not be easily worked out by a professional in the field
The project may research or develop a new process, product or service, or improve on an existing one.
We can help you work out if you have an eligible R&D claim, calculate costs associated with the claim, produce robust R&D reports to submit with your R&D claim to HMRC and keep your R&D records up to date.
If you believe your company has conducted R&D and is eligible to claim then please contact us or speak to your existing accountant as soon as possible.
You have two years from the end of the accounting period to make an R&D claim.