What is R&D tax relief?
Research & development tax relief was created back in 2000 as part of a series of measures to encourage small and medium businesses (often called SMEs) to invest in research and development. The aim was to boost the economy and also to increase innovation in the UK. There was a general recognition that the more UK companies pushing forward in developing new technologies, the better it is for the overall economy.
The scheme has been altered over the years but currently, the research & develop tax relief could be worth up to 33% of the qualifying R&D costs. That means the risk of developing something new is greatly reduced and allows SMEs to branch out into new areas or develop new technologies with a financial support network in place.
What is R&D?
So, what is classified as research & development that would allow a business to make this claim? The definition says that R&D is:
- Creative work, away from the normal routine work of the business that is aiming for a novel element or outcome
- Systematic work to achieve a goal, rather than the one off or lucky discovery so a novel or unique product doesn’t count because it isn’t systematic
- Any work that enhances knowledge – so the research must be scientific or technological and result in some advancement and isn’t copying or reverse engineering of an existing product
- Not in the areas of humanities or social sciences
Further to this, it is said that the work must not ‘merely duplicate’ what others have done but must be a ‘significant or perceptible’ advance on previous work. The activity must also meet the definitions set out by the Department for Business, Innovation and Skills.
While the research doesn’t need to be life-altering, it does need to be an advance on what is already known, even if this is by a small increment. The company may also work on a project that is similar to another one but may be more cost effective. Or there may be no public information about the product that means the business’s work is classed as development. Big name companies such as Google and Apple hold many such projects but never release details so while a company may be working on something the same, it will count as R&D as there is no public record of this project.
Even if the project fails, the business can still register for this tax credit as failure is often a part of developing something new – it just means that you need to work on it from a different angle or try something new.
What can you claim?
Once the work being done qualifies as research and development, then the business can claim for HMRC R&D tax credit. This is a type of business tax credits that are governed by these stipulations and can be claimed on any revenue expenditure in the outlined area including the day to day running costs of the business but not any capital expenditure on assets.
Employees who are working on R&D and have a contract of employment directly with the company can fall under the research & development tax relief system. They must not be consultants, agency workers or anyone employed by another company but may be staff providers or subcontractors under some situations.
Any consumable or transformable material used in R&D can come under the tax credit. These are the physical materials used to create the development rather than things like telecommunications or data costs.
Utilities used to conduct the research can come under the tax relief system including power, water and fuel costs. Also, any payments made to subjects of clinical trials to test the research can be included as well as software used directly in the research.
How to claim
The business must claim for any HMRC R&D tax credit when it files its Corporation Tax returns or amended returns. The timescale normally for this is within two years of the end of the relevant accounting period.
To claim, there is a box to select on the relevant Corporate Tax return form, either box 99 or 100 depending on the size of the company. Expenditure is then detailed in box 101. This is the amount spent multiplied by either 130% or 230% depending on which is applicable. This figure needs also to be included in the enhanced figure for profit calculations or loss, either box 3 or box 122.
Additionally, for SMEs there is the option to convert some or all of this tax relief into business tax credits. To do this, put the amount payable into box 87, 89 and 143 as well as marking to have ‘repayment due for this return period’ on the first page of the form.
HMRC also asks that businesses tell them why the projects are considered applicable under the R&D system and a summary of costs incurred on the project as well as details of how these costs were worked out.
The system of business tax credits for those working on research and development has seen a rash of new innovations since it was created. It allows businesses to try things that otherwise they may fear doing due to the financial implications and has already resulted in some amazing developments to our knowledge in science in technology.
Easy R&D have helped hundreds of companies to make R&D tax relief claims. Contact your nearest R&D Consultant to see if you can claim – 0800 195 7516