R&D Tax Credit Guide | Tax Guides | dsmRandDTaxCredits.co.uk

Get in touch:

Home/Guides/Research and Development Tax Credit Guide

What are R&D tax credits?

Research and development tax credits gives enhanced tax relief to companies that spend money on new systems, products or services. It is divided into two schemes: the Large Company Scheme or Research and Development Expenditure Credit (RDEC) Scheme and the Small or Medium-sized Enterprise (SME) Scheme. Our free R&D tax credit guide highlights the main points and dispels some of the myths surrounding the governments R&D scheme for companies in the UK.

Research and Development tax credit guide

R&D Tax Credits for SMEs

What is a Small or Medium-sized Enterprise (SME)?

To be classed as an SME, you must have no more than 500 employees, including students and part-time workers. You must also have a balance sheet of no more than £86million or an annual turnover of no more than £100million. This does not include SMEs that are part of a larger company or subcontractors.

What are R&D Tax Credits worth to SMEs?

There is a whopping 230% rate of tax relief available on all qualifying Research and Development costs for all qualifying SMEs. So, you spend £100 on R and D and your taxable profits fall by £230. Or, if you spend £100,000 on R and D activities then you save £46,000 in Corporation Tax at 20%.

  • If after the enhanced relief is claimed your SME is loss making – you can either carry the loss to the previous 12 months or carry it forward against future trading profits. Or under specific rules, you can surrender the loss to HMRC and claim cash credit at a current rate of 14.5%.
  • Example: You have £50K profits and R and D qualifying expenditure of £100K. The enhanced expenditure is £130K, resulting in an 80K tax loss. Surrendering this loss at the rate of 14.5% gets you a tax credit of £11,600.

R&D Tax Credits – Large Company Scheme and RDEC Scheme

What is a Large Company?

A large company is any company with more than 500 employees and annual turnover of over £100million, or a balance sheet of more than £86million.

Basically, if your business’s definition is not within the parameters of an SME, then you are classed as a large company.

Large companies must spend at least £10,000 on R and D activities during the applicable accounting period, in order to qualify for R and D tax credits.

The Large Company Scheme

The enhancement rate on the Large Company Scheme is 30% and you can only claim this up to 31st March 2016. This brings down the taxable profit for the company, but cannot carry losses forwards or backwards and no cash payments are allowable.

  • If after the enhanced relief is claimed your SME is loss making – you can either carry the loss to the previous 12 months or carry it forward against future trading profits. Or under specific rules, you can surrender the loss to HMRC and claim cash credit at a current rate of 14.5%.
  • Example: You have £50K profits and R and D qualifying expenditure of £100K. The enhanced expenditure is £130K, resulting in an 80K tax loss. Surrendering this loss at the rate of 14.5% gets you a tax credit of £11,600.

The Research and Development Expenditure Credit (RDEC) Scheme

The RDEC Scheme was launched in April 2013 and allowed loss making companies to claim a cash credit (not available as part of the Large Company Scheme).

Prior to April 2016, companies could choose which scheme was best value for them (between RDEC and Large Company Scheme), since April 2016 the RDEC Scheme is the only option for a large company.

RDEC is taxable and companies with no Corporation tax liability will get the net amount. From 1st April 2015, the RDEC rate was 11% and Corporation tax was reduced to 20%, so large companies now receive 8.8% (net) of their R and D spend. The figures change each year, so you need different calculations if you are applying for previous year’s R and D spend.

What does your business do, that HMRC would define as R and D?

Using their own words, HMRC consider that the aim of an R and D project will be, “the resolution of scientific or technological uncertainty”. Now this doesn’t just apply to experiments done in secret laboratories, probably involving test-tubes and Bunsen burners. It involves any company that invests in solving a problem with technological development. Official ‘project’ protocols will be followed, expert staff possibly drafted in and the outcome is definitely not certain.

Your business could easily be working on R and D projects right now – but they aren’t necessarily in your R and D Department and you may not realise that they fall into HMRC’s definition of R and D.

Has your business:

  • Invested in improving production efficiency?
  • Used technology to create new services, tools or other products?
  • Collectively pondered…’I’m not sure how to resolve this’?
  • Faced and overcome, or lost the fight with, any ‘technical’ issues?
  • Spent money on making products better by tweaking the tech?
  • Tried out different manufacturing methods, tools or appliances?

The aim of your project is of paramount importance, it must state the scientific or technological ‘advancement’ with absolute clarity. The answer must be an uncertainty that cannot be answered by a ‘competent professional’. In other words, if an expert in the field could find out the answer easily elsewhere, then this would not be counted.

It is more than likely that other businesses in your sector will be tackling the same problems. You may even know that a competitor has solved the problem! But this doesn’t make any difference to your R and D Tax Credit eligibility, unless they have published their resolution in enough detail that others could replicate their find.

What evidence does HMRC need?

We know exactly what a successful claim looks like! So you don’t need to worry about retaining all this information. These are the questions HMRC require answers to and that we will ask you, in preparation of your R and D Tax Credit claim:

  • Exactly what is the technological or scientific advance?

This will, hopefully, be clearly within your project’s aims.

  • What ‘uncertainties’ were you exploring?

A simple, non-technical explanation of the problem(s) you wanted to overcome.

  • Why didn’t you get the information from another professional?

HMRC want to know that “competent professionals” tried to locate existing knowledge and were involved with defining the research as having ‘uncertainty’, rather than just being day-to-day research. This means that the project’s leader(s) will need to explain their view in writing and you will need to provide the proof that they are “competent professionals” (experience and qualifications).

  • How and when did these ‘uncertainties’ get resolved?

This is a short report of what you did, an analysis and an evaluation of the project’s conclusion. Was the project a success or a failure? This doesn’t necessarily mean having an actual new item to sell; gaining knowledge, improving efficiency and reducing costs are all just as legitimate. Patents and copywrite ownerships are helpful with this section.

My project failed to ‘resolve the uncertainty’ – am I disqualified from the R and D Tax Credits now?

Rather delightfully, HMRC have adopted the scientific spirit of Thomas Edison, with regard to unsuccessful projects: “I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work.”

In other words, you get R and D Tax relief even if the project fails. It is seeking innovative solutions that warrant the tax credit, not the scientific or technological achievements themselves.  He’d probably have got R and D Tax relief for every one of those 10,000 times, as well as the final successful lightbulb!

What parts of the project are considered eligible costs?

Basically, any elements that are “directly and actively engaged in research and development activities” (HMRC):

  • Staff – direct employees. If they only spend part of their working week on the R and D project, this cost can be calculated proportionately. Includes pension, employers NICs and gross salary.
  • Clinical trials – volunteer payments
  • Materials – any actual ‘stuff’ you use during the project
  • Staff providers – if the individual employees are contracted to them
  • Utilities – power, water, fuel. Again, this can be calculated proportionately to the amount of time these things are being utilised for the R and D project work.
  • Subcontractor – Possible to reclaim 65% of the cost of bringing in subcontractors to work on the project.
  • Software – specific to the project development

GET IN TOUCH

Logos - in aid of NSPCC and SSL accreditiation

In aid of NSPCCSSL Secure site
Call us: 0330 0539 112Send a message