R&D Tax Credits Explained

The R&D tax credits scheme is ran by the government and aims to promote companies’ investment in scientific and technological research and development projects.

R&D stands for research and development and increases your company’s development costs which, in turn, reduces your taxable profits and saves you on your corporation tax bill.

If your company makes a loss, then your tax savings can be claimed as a cash refund in the form of  R&D tax credits. The only prerequisite in this case is that you have paid NICs and into PAYE for the period in question.

It’s not just a one off! You can claim this relief on an annual basis as long as your Research and Development projects fall within the parameters of eligibility.

Wish you’d known about this before?

Well, you can make a claim that is backdated for the last two financial years and in some cases you can get the corporation tax refund as a straightforward cash payment.

How does the R&D Tax Credits scheme work?

The R&D scheme is subdivided into two; Small or Medium-sized Enterprise (SME) scheme and the Large Company Scheme or Research and Development Expenditure Credit (RDEC) scheme.

Small or Medium-sized Scheme

As of 1st August 2008, this is defined as being for companies with up to 500 employees and either an annual turnover up to £100million or a balance sheet reaching £86million. The company must not be in liquidation or administration when the claim is filed.

This does not include sub-contractors; there is a different set of rules covering this group within the Large Company Scheme. It also does not include this size of company that is actually part of a large company.

As of 1st April 2015, the rate of 230% tax relief is applicable to all eligible Research and Development costs. This means that your Corporation Tax is reduced by an extra £130, on top of the £100 spent, for every £100 worth of eligible costs.

The RDEC Large Company Scheme

The Large Company Scheme is the only one you can claim through if your company does not fit the definition of a small or medium-sized company. Your company must have spent a minimum amount of £10,000 on Research and Development during the specified accounting period in order to be eligible.

The rate of tax relief available, as of 1st April 2008, is 130%. This means that you get an extra £30 on top of the £100 spent for every £100 worth of eligible R&D costs.

What qualifies for R&D Tax Credits?

The R&D project must be directly related to your company’s business. Your company may already be up and running or it may be one you are going to start once you have the conclusions of the research.

To be eligible the R&D project must have “the resolution of scientific or technological uncertainty” as its aim. It cannot be just advancement; it must intend to resolve an existing “uncertainty”.

It is worth noting that science does not include social sciences, economics, humanities or the arts.

What evidence do I need for an R&D Tax Credit claim?

HMRC advise businesses to include the answers to four questions within their claim, in order to clarify the R and D project’s eligibility.

Some of the popular questions you need to provide an answer for include:

What is the scientific or technological advance?

Not just the end product or process that the project is researching, but clearly states the advancement within the aims of the project.

What were the ‘uncertainties’ you were investigating during the project?

So, is the subject of the project possible? Can the answer be found in your field? If not, then you have technical or scientific uncertainty and you need to explain this in layman’s terms as part of your application.

When and how were these uncertainties resolved?

Here HMRC are looking for a short summary of your methods and analysis which demonstrate the complexities involved in your project. A conclusion about the success or failure to resolve the initial uncertainty is also necessary.

Why didn’t you find the necessary information from another professional?

There may be no available information about your project’s subject, in which case your project’s leaders must be identified as “competent professionals” with a summary of their qualifications and experience.

They must also submit an explanation of why they feel there is a technical or scientific ‘uncertainty’ involved and not simply routine research.

The key factor is that the intention of the R and D work is to make and advancement in a scientific or technological field in order to resolve an existing uncertainty. The project does not have to have a successful conclusion, nor does it have to result in the selling of a new product.

What costs can you claim for as part of a R&D tax credit claim?

You must be able to prove that each of these factors is “directly and actively engaged in research and development activities” (HMRC):

  • Utilities – fuel, water, power
  • Software
  • Subcontractor – if you hire a subcontractor to do some of the R and D work then you could be eligible to claim back 65% of this cost.
  • Capital expenditure – If you spend on capital assets as part of your project you may be able to claim R and D Capital Allowances.
  • Staff providers – if they have a contract with the individual employees they provide you with.
  • Staff – employees your business directly employs; not consultants, people who are contracted to other companies or agency workers.
  • Materials – the physical ‘stuff’ you need for your project work.
  • Clinical trials – payments to volunteers in clinical trials

R&D Tax Credits Good to Know:

  • If you get any kind of grant or subsidy, that is not ‘State Aid’, then you can still make and R and D claim. The amount will simply be reduced by the total of your subsidy or grant.
  • You make the claim on your Company Tax Return; using Box 99 if you are in an SME scheme and Box 100 if you are in a Large Company Scheme.
  • You enter your ‘enhanced expenditure’ into Box 101 of your Company Tax Return.

The time limit is two years after the end of the applicable Corporation Tax accounting period.

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