In this blog, we explore what Research and Development tax relief is and how you can make the most of any R&D tax reliefs available to you.
What is R&D Tax Relief?
R&D Tax Credit/Relief is a UK tax incentive that was introduced in 2000 for small and medium enterprises (SMEs) and was designed to encourage companies to invest in Research and Development. Over the years, the R&D incentives have been enhanced to encourage and reward greater innovation in the UK.
Why are many eligible SME’s not claiming the Research and Development tax relief?
This is often due to a lack of awareness, or a misunderstanding of the requirements for R&D relief. The scope for identifying R&D is huge and comes as a surprise that it can exist in every single sector.
There have also been warnings that genuine R&D businesses could be impacted by government proposals to combat tax relief abuse.
What activities count as R&D?
Whatever your size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out a qualifying activity. This could include:
To get Research and Development tax relief you need to explain how a project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
What costs qualify for Research and Development tax credits?
- Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
- Subcontractors and freelancers. Materials and consumables including heat, light and power that are used up or transformed by the R&D process
- Some types of software
- Payments to the subjects of clinical trials
Claiming Research and Development tax reliefs
At present, SMEs can claim up to 33p for every £1 spent on qualifying R&D activities. You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.
SMEs are permitted to claim R&D tax relief if they have:
The relief permits SMEs to deduct an additional 130% of qualifying costs from their yearly profit. This is in addition to the normal 100% deduction, giving a total deduction of 230%.
A company may be able to surrender losses for cash repayments in instances where the R&D tax claim creates a tax loss. Currently, this is calculated at 14.5%.
In order to make the most of R&D tax relief, a company must have incurred expenditure on qualifying R&D projects that are related to its trade. Projects must be innovative and should assess and attempt to resolve scientific or technological issues.
If you submit a claim and it meets the criteria, you will receive either a cash payment or a reduction in your Corporation Tax. If you are making an R&D claim for the first time, you may be able to claim R&D tax relief for your last two completed accounting periods.
Using the Research and Development Expenditure Credit (RDEC) scheme
The RDEC scheme is a replacement for the large company scheme but can also be used by SMEs that have received a grant or a subsidy for their R&D project or are subcontracted to carry out R&D work by a large company. The credit is taxable and is calculated at 12% of a company’s qualifying R&D expenditure incurred. This credit may be used to discharge the corporation tax liability, depending on whether the company makes a profit or a loss. It could also result in a cash payment. Where no corporation tax is due, the amount can be repaid net of tax or used to settle other debts.
Research and Development tax credit cap
Government concern about abuse of SME Research and Development tax relief means that with effect from 1 April 2021, there is a cap on the amount of payable SME tax credit which can be claimed in any period.
If the proposals go through as anticipated, this will be £20,000 plus three times the total PAYE and national insurance contribution (NIC) liability for the period. The PAYE/NICs bill to look at is not just the bill for those involved in the R&D work: it applies to the company’s entire PAYE and NICs spend, as well as the PAYE and NICs of connected persons carrying out subcontract R&D for the company or supplying workers to the company.
There have been warnings that genuine businesses will be impacted, but the measure is not intended to penalise bona fide claimants.
Companies claiming a payable credit less than £20,000 will not be affected. If the company meets two tests, a claim of any size will not be capped. The conditions are that its employees are creating, preparing to create, or managing intellectual property; and that less than 15% of its R&D qualifying expenditure is spent with connected persons.
How we can help
Research and Development tax relief is sometimes said to be a missed opportunity for SMEs, who often undertake an innovative scientific or technological project advancing their business, without realising the activity could qualify for relief.
If you want to know more about R&D tax relief, please don’t hesitate to contact us for an in-depth discussion.