What is the R&D Tax Credit?
The system of R&D tax credits was introduced back in 2008. At the time, research and development was at something of a lull in the country and the government recognised that it was key to help boost the economy. They introduced the system to encourage businesses to involve themselves in projects that they otherwise might not have embarked on due to financial constraints or the fear of failure.
The system is two tier – one level for small and medium enterprises and the other for large companies. The split between the two is either having less than 500 employees and either an annual turnover less than €100 million or a balance sheet under €86 million. Any business with over these amounts is classed as a large company with slightly different rules and amounts they can claim.
How much is the credit worth?
Currently, for small and medium enterprises (SMEs) the rate of the research and development tax credit is up to 33% of the qualifying R&D spend.
Another big benefit about the system is that the company doesn’t have to be paying tax to claim the credit. There are two options available for a business that doesn’t make enough money to pay tax – either keep it as a credit towards next year’s probable tax bill or have the money as a tax credit that is refunded to the business. This might be particularly useful if the business is experiencing some financial problems and needs an injection of cash.
Understanding if your business qualifies
One of the main reasons that businesses don’t claim for this tax credit is that they don’t understand what can qualify under the scheme or that they think the work that they do wouldn’t be classed as research and development.
One of the main misconceptions is that the work needs to involve some sort of laboratory work to qualify for the tax. But this isn’t the whole picture – many companies have made a claim where they are researching software development, for example. Other examples of research and development projects that have been authorised for the credit by HMRC include:
- New web-based customer relationship management systems
- Bespoke time recording and billing systems
- Translation software
- iPad and iPhone applications
So how could these items qualify as research and development, you might wonder? Because they are either making an improvement on existing knowledge or are resolving a scientific or technological uncertainty.
The definition of R&D
For a project to qualify, it must first have a clear start and finish date rather than simply a random discovery during the course of other work. This shows a system whereby the discovery was made using some form of process that can be documented and repeated if required. This doesn’t mean that you need to be the only company working on the project either – ten other companies could be working towards the development at the same time. As long as you qualify as a project and show that you have added to the existing knowledge or developed something new, then you will qualify for the credit.
Another point is that the project doesn’t have to be a success to qualify. Failure is as important as success in research and development because it teaches us something every time. Option A might not have worked but with what was learned, we can then go to onto Option B which has a better chance of success. So even unsuccessful projects can qualify for the credit.
One stipulation is that the project must be ‘trade related’. What this means is that it is relevant to either the existing trade of the business or an area they are expanding into. To qualify for this, the company must be involved in or in the process of beginning to produce goods or services to customers in the area that the R&D is being carried out. Of course, this is quite a broad definition – a company could develop its own internal software system and qualify because it has enhanced the existing knowledge in that area.
What can be claimed for?
Knowing that you can claim for the tax credit is only part of the process – you also need to know what can be claimed for to make your claim. There are quite a few areas that can be claimed for under the tax credit and a few exclusions:
- Staff costs – the cost of staff wages for the time spent working on the project based on their gross salaries. Information about the background of the individual is required along with information about what they did
- Software – any software purchased for the project can be claimed for
- Materials – any materials used in the project can be included in the claim as long as they are actual physical materials consumed in the work rather than telecommunications or data costs
- Utilities – power, water and other utilities used in connection with the project can be included in the claim
There are a few exclusions, such as staff who are not contracted directly with the company but there is also a provision regarding staff used through a staff provider.
Claiming for R&D tax credits can be a little complicated and this is why many businesses turn to an expert in the area to ensure their claim qualifies and that they claim for everything applicable. But the results in making the claim can help the business continue to work in research and development going forward as well as helping the economy.
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 –