If you are new to research and development tax relief there will be all kinds of questions you’d like answered so we’ve put together a list of FAQs to help. Easy R&D offer technical and specialist tax expertise to maximise R&D tax relief claims.
In 2000 the UK government introduced a scheme to encourage scientific and technological innovation. R&D relief allow companies that carry out qualifying R&D related to their trade to claim an extra corporation tax deduction for certain qualifying expenditure. The government have pledged to run R&D tax credits until 2032.
You have to attempt to overcome scientific or technological uncertainties at your own risk by creating new or enhancing existing products, services, software or processes – qualifying R&D activity. Other qualifying criteria include: your company is a SME (HMRC definition); your R&D is contained in an identifiable project; and the R&D has costs such as staff and materials.
The deadline for amending Corporation Tax (CT600) is normally 24 months after the end of your company’s twelve month accounting period.
If for example you file accounts to 31 December each year, for accounting period ended 31 December 2017, you have until 31 December 2019 to submit a R&D tax claim. Hence from 1 January 2020 you can no longer claim for qualifying R&D activities between 1 January 2017 and 31 December 2017.
Small to medium businesses (SME) can claim effectively 25% – 33% on qualifying R&D costs depending on the profit/loss position – the current average SME claim is around £60,000. Another scheme for larger companies, called Research and Development Expenditure Credit (RDEC) gives a less generous tax relief credit of effectively 9.7% on eligible R&D costs. Note: prior to 1 Jan 2018 the effective rate for RDEC was 8.8%.
As far as HMRC are concerned R&D is all about taking a risk to overcome scientific or technical uncertainty for R&D tax relief. The successful outcome or commercial utilisation of the R&D is of no interest to them.
R&D projects do not always fall conveniently in one financial year. You have to make a separate R&D tax credit adjustment for each tax year the project is active and incurring eligible R&D costs. HMRC allow you to re-state corporation tax via a CT600 for up to 24 months from the end of your company’s accounting period.
For a company making a loss a R&D claim will increase the loss. This can be carried back, carried forward or surrendered for a cash payment at a rate of 14.5% against the enhanced expenditure under the SME scheme.
HMRC define a SME for R&D tax credits purposes as a company with fewer than 500 staff, and either a turnover of less than €100 million or gross assets of less than €86 million. This is double the more widely used European Union SME definition. It is important to note that companies which are members of a group structure need to apply the SME definition limits to all worldwide companies in the group as if they were a single economic entity.
When your company grows beyond SME it’ll fall under the less generous research and development expenditure credit (RDEC) scheme. However there is a grace period and your company will not change status until the SME conditions have been exceeded for 2 consecutive years.
This is eligible for R&D tax credit providing details of how to produce the original is not publicly available or deducible by a competent professional in the field. It is also helpful when claiming to show that you have made improvements to the competitor’s product, service, software or process.
You can claim 65% of any costs you’ve paid to a subcontractor undertaking R&D qualifying activities. If your company is connected to the subcontractor or any other company then there are likely to be additional accounting steps to calculate the effective R&D costs.
As long as your company is bearing the risk for the outcome of the R&D activities the costs are eligible. If your company is connected to the main contractor or any other company via a shareholding then there are likely to be additional accounting steps to calculate the effective R&D costs. It is also possible to apportion the benefit between two separate claims if both parties are collaborating and each pays their own R&D qualifying costs.
Charities, LLP’s (and Scottish equivalent SLP’s) do not pay corporation tax so they are ineligible for the SME R&D tax credit scheme. The only exception to this would be if the LLP or SLP was part owned by a partner registered as a company paying corporation tax. Any claim would have to be routed through this partner in proportion to their share.
Individuals and sole traders do not pay corporation tax so R&D tax relief cannot apply. It makes sense therefore to plan ahead and register a company before embarking on a significant R&D project.
The location of the R&D activity does not matter for R&D tax credits provided your company is subject to corporation tax in the UK. If you sub-contracted qualifying R&D to another then you can claim 65% of the payment to the sub-contractor. If your company is connected to the overseas R&D company or any other company then there are likely to be additional accounting steps to calculate the effective R&D costs.
Companies connected to each other via a shareholding affects R&D tax relief eligibility because HMRC treat them as a single economic entity. This can easily increase things like staff numbers to such an extent that a R&D tax relief SME claim is no longer valid. Instead the claim would have to be submitted under the less generous research and development expenditure credit (RDEC) scheme.
HMRC allow any R&D qualifying expenditure amount to be claimed.
For VAT registered companies inputs are recovered in a VAT return and therefore not included in a R&D tax relief claim. However for exempt companies, e.g. Aviation or Financial Services then VAT can be included.
If a prototype is made for R&D purposes, then design, construction and testing costs are qualifying expenses. However if the R&D prototype is produced and then sold the production costs would not be eligible but design, modelling and testing could still qualify.
Staff have to be reimbursed for any expense that directly relates to the R&D activity, e.g. travelling or subsistence to be an allowable expense for R&D tax credits. If your company initially paid for the staff expense e.g. on account or by company credit card then these costs are not allowable.
If the software was directly employed during R&D then you’ll be able to claim a reasonable apportionment.
Employer pension contributions can be included in a R&D tax credit claim. The burdened salary of an employee (salary, national insurance and employer pension) are apportioned depending on how much time was spent on the R&D project plus any reimbursed R&D related business expenses.
Buildings, plant and machinery are normally treated as capital assets and not eligible costs under the SME and RDEC schemes. Instead the capital expenditure may qualify for a separate Research and Development Allowance.
Director’s dividends do not count as qualifying expenditure for R&D tax credit. This is because dividends are distributed to shareholders from net company profit and not treated as an operating expense. Hence any company director undertaking R&D with a comparatively low salary and significant dividends should consider delegating as much R&D work as possible to other staff in order to maximise R&D tax credits.
Typically if you are claiming R&D tax credits for the first time HMRC allow estimates providing there is solid financial evidence with a robust apportionment methodology. It’s best to be prepared for future claims by keeping time sheets or other record keeping for R&D staff activity so that claims can be maximised.
If your grant is classified as State Aid then expenditure is not eligible under the SME R&D tax credits scheme. You will have to claim instead under the much less generous research and development expenditure credits (RDEC) scheme.
Easy R&D levy a fee based on the percentage of successful R&D tax credit claim amounts, with no upfront consultancy charges i.e. no win, no fee.
We’ll consider all potential R&D tax relief claims. On the one hand we need to sift through “commercial innovation” with some clients who believe they have a large R&D claim, but don’t, and on the other hand, tease out claims from clients who don’t even realise the extent of their substantial R&D activities. We want to know the whole picture before suggesting whether you take the next step – let’s talk.
Easy R&D will determine your eligibility at the outset. With a fee only paid on a successful claim we certainly don’t want to waste your time, or ours. The 5 Easy Steps R&D tax relief claims process doesn’t require your work time either after an initial meeting, you can complete it at your own pace via our online portal. Why not contact us and join the hundreds of Easy R&D’s clients who’ve benefited from the R&D tax credit SME scheme?
In common with all professional tax advisors we are obliged to have a terms of engagement agreement between Easy R&D and a company director to give you company tax advice. We also have to be registered with HMRC as an Accountancy Services Provider, comply with the Money Laundering Regulations and maintain professional indemnity insurance, details available at Standard Terms of Business.
Depending on the complexity and how quickly you can get information to Easy R&D a claim can be normally submitted in 2 – 3 weeks.
HMRC’s R&D Units aim to review a SME R&D tax credit claim within 28 days, and pay within a few weeks later. Complex claims and those filed during peak times such as March year ends or holiday periods may take a little longer. The latest information about claim times is here.
If you are simply telling your accountant what to claim then it’s highly likely you’ll be significantly understating the actual R&D undertaken. Easy R&D take the opposite approach where we’ll be probing your company’s activities on a technical level and prompting you to reveal the true extent of your company’s R&D. This can be achieved without taking up valuable work time. Even if you’ve already submitted a claim with an accountant we can give you a free audit for the last two calendar years from the end of your company’s financial period.
It is possible if you have plenty of time, can draw on the knowledge of a competent accountant and technical advocacy skills to submit your own R&D tax credit claim. However claims submitted by individuals almost always understate the tax relief amount, or omit to provide robust support for the qualifying costs, or respond to HMRC queries with an unconvincing technical narrative. As a specialist R&D tax advisor we submit hundreds of claims a year using a proven claim methodology, chartered tax accountants and professional report writers. Easy R&D will maximise your claim, liaise with the HMRC R&D Unit and there’s nothing to pay until the claim is successful.
HMRC R&D Units always ask us informal clarification questions before raising a more formal enquiry. This is because claims submitted by Easy R&D undergo care and due diligence using a proven methodology to exceed HMRC claim standards. However in the very rare event an enquiry is raised we will manage this at our cost until HMRC approve the claim. We have a 100% success rate across all claims. If you have submitted a claim to HMRC yourself and are facing an enquiry than contact us as we may be able to help.