Thousands of businesses across the UK are already benefitting from using the generous R&D tax credits scheme, which is designed to drive growth and innovation – but could your business be next?
R&D tax credits – What are they?
The Government created Research and Development (R&D) tax credits to reward those companies in the UK that are investing in innovation.
The credits offer a valuable source of income to help businesses invest in R&D, hire new talent and grow, by reducing their tax bill.
How do they work?
A company is typically eligible for R&D tax credits if it has:
OR
By claiming R&D tax credits on these developments the Government will either provide a reduction to your Corporation Tax bill or you may receive cash if the project leads to a loss.
However, don’t think that just because you aren’t working in some high-tech sector that you cannot claim R&D relief. This initiative is open to businesses in almost every sector if they can prove they have made an advancement.
In fact, within the government’s accepted research and development definition, R&D doesn’t even have to have been successful to qualify and you can also include work undertaken for a client, as well as your own projects.
Am I eligible for R&D tax credits?
In order to benefit from R&D tax credits, you must:
Which scheme should I apply for?
Depending on whether you are a small to medium-sized enterprise (SME) or large company, the scheme that you apply for can differ.
The scheme classifies a business as an SME if it has fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets.
Conversely, any business with more than 300 members of staff and either more than €100 million turnover or €86 million gross assets is classed as a large business.
SMEs must apply for the SME R&D tax credit scheme, while large companies can apply for Research and Development Expenditure Credit (RDEC) – although where an SME works alongside a large company on R&D, they may be able to claim RDEC or even both schemes.
What’s the difference?
SMEs can claim up to 33p for every £1 spent on qualifying R&D activities.
Large companies can claim up to 11p for every £1 spent on qualifying R&D activities.
The R&D tax credit rates are shown below:
How are these calculated?
The amount of support you receive via the tax credit system depends on your R&D spend and several other factors.
In order to calculate the R&D tax credit, you will need to identify qualifying expenditure and look at the relevant rate for your business in order to create a calculation for your enhanced expenditure.
When you deduct your enhanced expenditure from your taxable profits or add it to your loss, it will result in one of three outcomes:
- a Corporation Tax reduction if you are profit-making
- a cash credit if you are loss-making
- or a combination of the two
What costs qualify for R&D tax credits?
When submitting an R&D tax credit claim there is a wide variety of expenditure that can be covered. To help you make the most of this incentive please click on the headings below.
SMEs and large can claim staffing costs, such as:
- Gross salaries (including wages, overtime pay and cash bonuses);
- Employer NI contributions;
- Employer pension contributions; and
- Certain reimbursed business expenses.
However, benefits in kind, such as health insurance or a company vehicle are excluded as are director dividends.
Employees rarely spend all their time on R&D, so you must determine the appropriate apportionment of staffing costs to include in your R&D claim.
You may be able to include the cost of subcontracted R&D work, however, the amount and what can be claimed differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme.
For example, if you are making an SME claim, you can include 65 per cent of payments made to unconnected parties.
The rules in relation to Subcontracted R&D are complex so it is best to seek advice in advance.
Externally provided workers (EPWs) such as agency staff, contractors, and freelancer that are brought into the team to support with R&D are allowable expenditure.
However, they must work under the supervision, direction, or control of the company claiming credits.
Materials that are consumed or transformed in your R&D process are defined as consumables and can include basics such as water, fuel, and power.
Once your work to resolve the technological or scientific uncertainty is completed any additional costs for consumables that could be involved in further development or marketing should not be included in a claim.
Expenditure on computer software involved directly in R&D activities may be included, as can software partly used for R&D – at a reasonable apportionment.
Still not sure?
You may still be uncertain about whether your project will qualify for R&D relief.
Thankfully, we can seek out advance assurance from HM Revenue & Customs to ensure that if you meet the original brief for your project you are likely to receive the full benefit from this fantastic incentive.
What’s more, as this credit applies to the two previous accounting periods, if you have already completed work in the last couple of years you may still be eligible to apply, so why not get in contact to see if we can help.
Why work with Watson Buckle?
We already have a good track record of helping businesses claim R&D tax credits. We have saved our clients over £1m in tax so far, which we achieved by having a good understanding of the factors that contribute to a successful R&D tax credit submission.
Seeking out professional advice can drastically improve your chances of obtaining the funding that you need to invest in future R&D, so why not speak to our team today.
