Research & Development Tax Relief

The criteria for whether a project qualifies for the scheme is all down to whether it is considered a "Research & Development" activity. This is not a straight forward criteria and has little clarification from the HMRC. This often means that the judgement from the individual tax offices and investigators can vary from area to area. This means it's evermore important to provide a detailed supporting technical document with each claim.

For this tax, the qualification of "Research and Development" should not be considered necessarily in it's everyday meaning as here it is really the embodiment of criteria, case studies and grey areas.

To start off the process of qualification you need consider whether your company has undergone any innovative activities:

• Has your company enhanced any existing products?
• Has your company created any new products?
• Has your company undertaken any work to improve processes?
• Has your company made improvements in services in order to reduce costs, win more business or improve service levels?

If your company has undertaken any of the above you could qualify for R&D Tax Credits.‍

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If you have spent money on qualifying innovative activities in the past two years you can reduce your company’s corporation tax bill by an extra 130% of the amount you spent on the innovation .

Under these rules at the most simple level for every £1 on R&D activities spent you will receive 26p in tax relief. A loss making business also has the opportunity to claim a tax credit back from the government of up to 33.35% of the money spent on R&D activities.

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PROFIT MAKING BUSINESS

A profit making business will be able to claim the 130% enhancement which will save them an extra 26p in tax for every £1 spent.

Profit Making Business Example:
Your company makes a profit of £30,000 but spent £20,000 in R&D costs.
£20,000 x 130% = £26,000 to be taken off of your profit.
Profit £30,000 -  R&D £26,000 = £4,000 profit to be taxed normally.

In this example the R&D 130% enhancement has reduced your profits from £30,000 to £4,000. This means that your corporation tax bill has reduced from £6,000 to £800 which is a tax saving of £5,200!

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LOSS MAKING BUSINESS

When a company makes a loss relating to R&D they can choose to either carry forward or carry back that loss as is normally the case with losses but they also have the opprtunity to claim a cash credit of up to 33.35p per £1 spent on R&D activities.

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Carrying Forward/Back Example:
Your company makes a loss of £20,000 and you incurred £20,000 in R&D costs.

£20,000 x 130% = £26,000 to be added to your losses.
Loss £20,000 + R&D £26,000 = £46,000 loss .
£46,000 x 20% = £9,200 in tax saving losses to be carried forward or carried back.

In the example you had £46,000 in losses. If you carried this forward you would save £9,200 in future tax or if you carried back you could recoup £9,200 in previously paid tax.

This means that in a loss making business for every £1 in R&D costs you have, you will save up to £0.46 in corporation tax.

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Tax Credit Example:
Your company makes a loss of £20,000 and you incurred £20,000 in R&D costs.

£20,000 x 130% = £26,000 to be taken off of your profit.
Loss £20,000 + R&D £26,000 = £46,000 loss .
£46,000 x 14.5% = £6,670 tax credit back you.

In the example you had £46,000 in losses. By claiming the tax credit you receive £6,670 in cash today.

This means for every £1 in R&D costs that you have, you will receive up to £0.33 back from the government.

There are various costs that can be claimed for, some of which you may not think of. Below are a list of the various costs that relief can be claimed on:

• Staff costs (Salary, Employer’s NI & Pension contributions)
• Any materials consumed during the R &D process (you can also include a proportion of your Light & Heat costs and your water rates)
• Subcontractor costs (65% is allowed if they are an unconnected person)
• Agency provided workers (65% is allowed if the agency is not a connected entity)
• Cost of the software used for the R&D process

Other expenditure such as travel & subsistence, car hire & motor costs, telephone etc would not be allowable for R&D tax relief purposes

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Companies are able to make a claim for their R&D projects whether they were successful or not. The R&D Tax Relief does not discriminate between the two as it aims to encourage businesses to innovate. The scheme therefore helps businesses to mitigate some of the financial risk involved in research and development.

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If your Research and Development projects spans multiple years we will help you to make a separate claim for each year including the respective qualifying expenditure. The total tax saving will be the same result as if the project fell into one tax year.

SMEs can benefit from an enhanced rate of R&D tax credits compared to larger businesses. For a company to be regarded as an SME and qualify for this scheme it must meet the following criteria:

- Must be a UK Limited Company
- Must employ fewer than 500 people
- Have either an annual turnover of no more than £100 million or a balance sheet total not exceeding £86 million.

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There is a 2 year time limit to how far back you can make a claim on incurred R&D expenditure. The date that the costs were paid must have occurred within 2 years starting from your current company year end date.

For Example -  If your company tax year end date is the 30th June 2016, you can claim any qualifying R&D costs incurred going back to the 30th June 2014.

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