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Handy guide for business owners
R&D tax credits are a very generous, Government backed tax relief for companies; they allow qualifying companies to either reduce (sometimes even eliminate) their corporation tax bills, or to receive a tax credit instead, by way of a tax refund. From RJP’s experience working with clients to obtain the relief, the average amount received by small to medium sized companies is £100,000. All companies are eligible to claim, provided they are carrying on qualifying activities and are liable to corporation tax.
How do I offset tax with R&D credits?
The R&D tax relief for Small and Medium-sized Enterprises (SMEs) works by allowing a company to claim the following:
- 100% of the costs incurred on qualifying activities as tax deductible expenses
- A further reduction in taxable profits of £125 for every £100 spent on qualifying activities.
What are the conditions to claim under the SME scheme?
You can only claim R&D relief under the scheme for SMEs if:
- your company meets the definition of a SME for R&D purposes, which is that:
- it has fewer than 500 employees and either of the following:
- an annual turnover not exceeding €50 million
- a balance sheet not exceeding €43 million
- The company is a going concern when it makes the claim;
- The activity for which relief is claimed is be a related or complementary trade to existing business activities;
Claims for relief can be backdated for up to 2 years.
In certain situations, even if your company meets the definition of a SME you may not be able to claim relief under the SME scheme, but you may be able to claim under the Large Company Scheme.
Example: Smith and Sons qualifies for R&D tax relief and they are able to claim 225% of allowable R&D costs for eligible projects under the SME scheme. So, if £100 of costs are incurred, 100% of this amount can be claimed as a tax deductible expense and in addition, remaining taxable profits can be reduced by a further £125.
What qualifies as research and development for tax credits?
In order to qualify, a project must achieve ‘an advance in overall knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainty’.
Qualifying projects include software development – not all the activities that fall under this heading will qualify under the scheme, but a lot will.
Developing a software product that is mostly content-based for example, won’t typically qualify. But products which involve issues of scaleability, performance, integration and technical innovation are likely to qualify.
Examples of what will qualify for R&D tax credits
The best way to establish whether you may be eligible for R&D tax relief is to start asking yourself some questions such as:
- Does the project have a start and end date rather than being a ‘eureka moment’ discovery?
- Did the project have a clear purpose at the outset?
- Was a field of science or technology involved?
- Did the project achieve improvements to functionality that were not previously available in the market place?
- Were technological advances sought?
- Were certain areas of technology uncertain before the project commenced?
- Was the knowledge sought not readily deducible by a competent professional?
- Was systematic investigative work carried out in the course of the project?
If you can answer yes to all of these questions you should be considering making a claim.
How to claim R&D tax credits
If you think you might be eligible for R&D tax credits the next step is to speak with an expert. This is a specialised area of tax planning and navigating the application process can be confusing. The first stage in the process of claiming for R&D tax credits is to complete an audit to assess the eligibility of projects, review the resources used and what expenditure could qualify. After this initial assessment if we believe you could make a claim, we will develop the application on your behalf, taking care of negotiations with HMRC.
If you would like to discuss any aspect of obtaining R&D tax credits for your business in more detail, RJP will be happy to assist. We offer a ‘no-win-no fee’ service for companies wishing to claim R&D tax relief. For more information, contact Lesley Stalker by emailing las@rjp.co.uk.
