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How R&D Tax Relief Can Cut Your Costs

For many businesses, a constant job is to look for ways to reduces taxes without overstepping boundaries or breaking rules.  The old advert that HMRC ran about ‘tax doesn’t have to be taxing’ is a bit of a laugh for most businesses – or a grimace.  Yet there are ways to reduce how much tax the business pays and also schemes that can get a business a tax credit.  One of those is the R&D tax relief system.

Basics ways to cut tax

As a rule, any cost that is ‘wholly and exclusively’ due to your business can be deducted as expenses from your income and therefore, reduces down how much tax you have to pay.  This can be a little more complicated where business and personal expenses are all wrapped up together so records need to be kept.

For example, if a work from home freelancer uses the landline 50% of the time for business calls and the rest for personal, they can only claim for half of the cost of the phone line rental and the cost of calls that are relating to the business.  Similarly, a car used for both private and business use can be claimed for to the degree that it is used for business – say this is one third of all journeys so 33% of costs can go down for the business.

There are lots of other ways to look at how to reduce taxable income within the rules.  Stationary, postage, costs of meals and drinks while away from home on business and even some entertainment costs can be included legitimately, though paperwork to support everything should be collected and kept for six years after the accounting period.

Capital expenditure

Another way to reduce how much tax you need to pay is for items bought for the business, which are called capital expenditure.  There are many examples depending on the nature of the business but these could be things like computers, office equipment and even the cost of buying a business premises.

If you are a window cleaner and buy ladders, racks for the van to carry the ladders and other equipment such as buckets and cleaning gear, this will all count as capital expenditure.  Basically, it is anything that the business needs but that isn’t bought on a regular basis.

R&D Tax Relief

One of the big ways that businesses can reduce their tax bill is through the R&D Tax Relief system but many companies don’t realise it exists or don’t think it could apply to them.  The system is part of the Corporation Tax system and offers tax relief for businesses conducting research and development in areas of technology or scientific area.

But how do you know if the work your business is doing counts as research and development?  For starters, the work must be within the company’s trade, either an existing one or an area that will be started as a result of the research work.  It must be:

  • A project that advances science or technology
  • Must contribute directly to existing knowledge
  • Or solve a current scientific or technological uncertainty

To qualify as scientific, it must not be in the arts, humanities or social sciences and must be more than just commercially innovative.  If it is solving an existing uncertainty, it must look at whether something is feasible, how to achieve it in practice or work on something that isn’t already available.  It must also be easy for a non-expert to see how the uncertainty has been solved or knowledge on the topic improved by the work.

How much is the tax relief worth?

There are two different tiers for the payment of the tax relief – small and medium enterprises (SMEs) and large enterprises.

An SME is a company with less than 500 employees and either an annual turnover less than €100 million or a balance sheet less than €86 million.  It is a little different from the definition under other areas such as for Corporation Tax or by HMRC.  Companies who exceed these limits are classed as large enterprises – Easy R&D focus on the R&D tax credit SME scheme.

For small and medium sized businesses, the tax relief for research and development is 33% of R&D qualifying costs, or a loss can be surrendered at a rate of 14.5%.

What can it be claimed for?

Like normal tax deductible expenses, there are things that the business can claim for under the scheme and others that they can’t.  For example, the cost of staff wages for those working on the R&D project can be claimed as long as they aren’t consultants, agency workers or people who have a contract with someone else.  There are some subcontractors that can qualify.

Materials can also be claimed for, providing they are used for the project even if they are consumed but don’t include things such as data or telecommunications costs.  Utilities such as power, water and fuel used directly for the work can be claimed for as can computer software used on the project.

While capital expenditure would cover investments made for the business, there are also some areas where you can claim R&D capital allowances for some purchases made for the project.

Conclusion

While it may sound complicated, the R&D Tax Relief can be simplified by using the services of an expert in claiming these credits.  This can result in the business receiving a large and very useful credit or even payment towards the cost of work they are doing and may allow the business to continue to develop or research something going forward.

Contact us

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.

How Can Companies Apply for R&D Tax Credits?

One of the aims of the government in recent years has been to make the UK a place of innovation and development.  To help inspire companies to do this or to help with costs of such research, they introduced a system of business tax credits.  Many companies don’t claim this credit because they think it doesn’t apply to them – but they may be wrong and apply for this R&D tax relief is a relatively simple process once you know you qualify.

R&D tax credits explained

The research and development (R&D) tax credits are a way that the government helps businesses that are involved in developing new technology or working on new scientific breakthroughs using the tax system.  For businesses that make use of the system, research shows that around 80% of them found themselves in a better financial position for having done the work – able to hire new staff, continue with research and even enter into new business areas.

R&D tax credits for small and medium enterprises

For businesses with less than 500 staff and a turnover of either less than €100 million or €86 million gross income, the SME’s tax credit applies.  In this, a business can claim back up to 33% spent on research and development, regardless whether the business is making a profit or not.

In 2017, businesses that did make a claim through the system saw an average return of around £60,000.

What qualifies under the R&D tax credits scheme?

The reason that many businesses don’t claim under the scheme is that they are unsure if the work that they are doing could qualify under the scheme.  This leads to uncertainty and the decision that time spent trying to claim could be better spent elsewhere.  However, there is a surprisingly large amount of research that can fall under the R&D tax relief system.

The basic qualification is that the work is taking a risk to ‘resolve scientific or technological uncertainties’.  This means that if the business is creating new products, process or services, then it may be eligible.  It could also be the case if the business is changing or modifying an existing process, product or service.  And the most important fact is that the research doesn’t have to be a success to make a claim – failed projects contribute to knowledge and are also eligible.

Examples that have already been accepted by HMRC and the tax credits given to the business include:

  • Translation software
  • iPad and iPhone applications
  • Bespoke time recording systems that incorporated billing
  • New web-based customer relationship management systems (CRM)
  • Dedicated software apps for sub-contractors

The project needs to have a clear start and end date and must involve a process over a period of time rather than a spur of the moment discovery.

What R&D tax relief can businesses claim for?

If a business thinks that the work it is doing might qualify, then how exactly does it work out what it can claim for?  Again, there is clear guidance as to what can and cannot be claimed for under the scheme.

You can claim for the costs of staff working on the project, based around the time they spend on it.  These can be gross of salaries, national insurance contributions and pension contributions but the person must have the right background for the project.  There are some situations where businesses can claim for subcontracted work but it is limited to 65% of costs and there are other rules apply.

Software that is specifically for the project can be included in the claim along with items and materials used or consumed during the research.  This includes things such as heat, light and power but only used in connection with the project, not for the larger business.

Getting help to make an R&D tax relief claim

A further step to ensure businesses claim what they are due is the development of services such as those offered by Easy R&D.  This enables businesses to go through a process to discover if they qualify for the tax credits and if so, quickly and easily submit the documentation.  Many businesses using the service get the money due to them within six weeks and this can greatly help the continued success of the company.

The system will involve asking a number of questions about the nature of the research such as:

  • Is it in a field of science or technology?
  • Is the work improving what is currently available?
  • Is it a scientific or technological advancement?
  • Is it working on a current uncertainty?
  • Are you investigating and testing results?

Once it has been ascertained that the work will qualify under the system, the information can be gathered to support the costs involved.  This can then be submitted through the relevant part of the T&D tax credits system to get the business the money that it is due or the credit against the following year’s tax if this is the case.

Conclusion

Research and development is crucial to expand our knowledge of all things and the government’s system rewards those involved in it.  Finding out if your business’s work qualifies is now easier than ever and there’s no reason why every qualifying business cannot get the money that the government has set aside for the, allowing them to continue the work into the future and also make a profit.

Contact us

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 

An Introduction to R&D Tax Credits for Startups

As a start-up business, one of the big concerns is cash flow.  You need to research and develop products but you also need to live and have money coming into the business.  The good news is that here in the UK, we have a system called HMRC R&D tax credits that can help start-up businesses offset this risk.

What is R&D tax relief?

Research & development tax credits was created back in 2000 as part of a series of measures to encourage small and medium businesses to invest in research and development.  The aim is to boost the economy and increase innovation in the UK.  If there are 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 & development 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 the definition of R&D?

The definition of research and development that would allow a business to make an R&D tax credits claim 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

In addition, 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 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.

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 as part of R&D tax credits?

Once the work being done qualifies as research and development, then the business can claim for HMRC R&D tax credits.  This is a type of business tax credit governed by these stipulations and can be claimed on any revenue expenditure in the outlined area. These can include the day to day running costs of the business but not any capital expenditure on assets.

R&D tax relief – Employee costs

Employees who are working on R&D and have a contract of employment directly with the company can fall under the research & development tax credits system.  They must not be consultants, agency workers or anyone employed by another company but may be staff providers or subcontractors under some situations.

R&D tax relief – Materials

Any consumable or transformable material used in R&D can come under the tax credits scheme.  These are the physical materials used to create the development rather than things like telecommunications or data costs.

R&D tax relief – Other areas

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 R&D tax credits

A business must claim for any HMRC R&D tax credits 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 also needs 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, the amount payable needs to be put 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 requests 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.

Conclusion

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.

How Easy R&D can help your business

At Easy R&D we are on a mission to support innovative businesses by helping them to claim R&D tax credits which they may be entitled to receive. This generous tax benefit can help a business to unlock resources, and for many, this enables a culture of innovation to be embedded into an organisation.

Our R&D Consultants are knowledgeable, highly experienced and can identify R&D costs which qualify for the scheme. We provide full end-to-end support to process claims, flexing around the needs of the client to minimise their time commitment.

If you’d like to enquire about R&D tax relief on any of your agriculture projects, you can speak to one of our experienced Consultants on 0800 195 7516 or submit an enquiry form for a free consultation.