Research and Development Credits are a Government incentive scheme designed to encourage innovation by rewarding UK companies with reductions in their Corporation Tax Bill if they carry out innovative activities. The UK has one of the most generous schemes with an estimated £6 billion per annum available to be reclaimed by SMEs.
The scheme effectively allows you to claim back the associated costs with any project you have undertaken that qualifies as Research or Development whether this be through reducing your corporation tax bill or by giving you a tax credit back.
We can help you to look over your projects or services and analyse what does and doesn’t qualify under the guidelines. We will also look back at your previous years to make sure all your activities are covered. Once we have identified what project does qualify we will administer an in depth cost analysis to find every penny you can claim for.
Our team will work closely with you to gather all the information needed to prepare your claim, helping you identify all potential costs that could be included.
They will also explain in Jargon Free English what technical information they will require in order to write the supporting narrative that proves your project meets the R&D criteria.
An R&D claim for a UK Company requires a detailed Financial and Technical report that explains how and why the project qualifies for R&D as well documenting the exact costs being put into the claim.
Our team will take all of the information and prepare the report, consulting you throughout and once complete will submit it to you as a draft to review.
Once the final version of the report is agreed, it will be sent for submission along with the amendment in your Corporation Tax Return.
After submitting the claim HMRC has up to 1 year to come back to you with an enquiry about any Corporation Tax matter. We will stand by you throughout this time, offering support and proactively dealing with HMRC for you, should an enquiry arise.
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:
If your company has undertaken any of the above you could qualify for R&D Tax Credits.
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.
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!
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.
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.
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:
Other expenditure such as travel & subsistence, car hire & motor costs, telephone etc would not be allowable for R&D tax relief purposes
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.
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.
