Does your business carry out innovative projects involving research and development? If so, you could be eligible for R&D tax credits.
Keep reading to find out what R&D tax credits are and whether or not your business is eligible to claim.
What is Research and Development (R&D) Tax Relief?
Research and Development (R&D) Tax Relief is an incentive designed by the government to support and encourage innovative businesses and boost spending with R&D companies.
Companies from all kinds of industries can claim the relief- even on unsuccessful projects, so long as the work is part of a specific project to make an advance in science or technology.
Depending on the size of your company and whether or not the project was subcontracted to you, there are different types of R&D relief that you can make a claim for:
Small and Medium Enterprises (SME) R&D Relief
SME R&D relief enables companies to deduct an extra 130% of their qualifying costs from their yearly profit on top of their usual 100% deduction, bringing it to a total of 230%.
It also lets them claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
You’re can claim SME R&D relief if you’re a SME with:
- Less than 500 employees
- A turnover less than £100 million or a balance sheet with a total below £86 million
You may be required to include any linked companies or partnerships when working out if you’re an SME.
Research and Development Expenditure Credit
Larger companies can claim a research and development expenditure credit (RDEC) when working on R&D.
SMEs can also make a claim if they have been subcontracted to carry out R&D work for a large company.
The RDEC is a tax credit calculated at 13% of your company’s qualifying R&D expenditure and is taxable.
The credit may be used to discharge the liability or result in a cash payment depending on whether your company is profit or loss making
Costs You Can Claim with R&D and RDEC
Staff Costs
If you have employees working directly on the R&D project, you can claim for a percentage of their:
- Salaries
- Wages
- Class 1 National Insurance contributions
- Pension fund contributions
You are also able to claim for any administrative or support staff who directly support a project e.g. specialist cleaning staff.
However, you can’t claim for clerical or maintenance work that would have been done for regular projects such as managing payroll.
If external agencies provide staff for the project, you can also claim 65% of the relevant payments made to them.
Subcontractor Costs
Subcontracted work can be claimed for if it is undertaken by:
- A charity
- A higher education institute
- A scientific research organisation
- A health service body
- An individual or partnership of individuals
Otherwise, it cannot be claimed for.
Consumable items
You can claim for all consumable items used up in the R&D project including:
- Materials
- Utilities
Costs You Can’t Claim For with R&D and RDEC
It’s important to note that the relief cannot be claimed on projects that make an advance in social science such as economics or in a theoretical field such as pure maths.
You also can’t claim for:
- The production and distribution of goods and services
- Capital expenditure
- Cost of land
- Cost of patents and trademarks
- Rent or rates
Is My Business Eligible for R&D Tax Credits?
In order to qualify for R&D relief, you must be able to explain how your project:
- Searched for an advancement in science and technology
- Had to overcome uncertainty
- Attempted to overcome this uncertainty
- Couldn’t be easily worked out by a professional in the field
You can also qualify if you research or develop a new process, product or service or work to improve an existing one.
Any advances you make must be within the overall field and shouldn’t just be for your business e.g. using a pre-existing technology for the first time in your sector.
To show that there was uncertainty involved, you must prove that your company or experts in the field cannot already know about the advance you made or the way you achieved it. This is because scientific or technological uncertainty only exists when an expert on the subject is unable to say if something is technically possible or how it can be done if it is.
This can be proven by showing past failed attempts or proving that your project team are professionals in the field and having them explain the uncertainties involved.
You must also be able to show that you needed to do research in order to overcome the uncertainty. This could be a simple description of your successes and failures throughout the project.
How to Calculate R&D and RDEC
To work out your expenditure you should:
- Calculate the costs that were directly attributable to R&D.
- Lower any relevant subcontractor or external staff provider payments to 65% of the initial cost.
- Add all costs together.
- Multiply the figure by 13% (0.13) to get the expenditure credit.
- Enter this figure into your tax return
How to Claim R&D and RDEC Tax Relief
You can claim the R&D and RDEC credit by entering your expenditure into the full Company Tax Return form (CT600). If your claim covers a period of over 12 months, you’ll need to submit a separate claim for each accounting period.
Get Help Submitting Your R&D Claim
At Ryans, we can help you to make your R&D claim and ensure you’re making the most of the tax relief available. If you need help with your corporate tax planning, please don’t hesitate to reach out to our team at Ryans to discuss how we can help you.