Although R&D is most often associated with software development, defence and aerospace industries, the generous tax reliefs are available to ALL businesses.
R&D tax credits are the government’s way of rewarding innovation. Many small businesses take advantage of this valuable scheme to maximise their profits and grow their business.
If you are wondering if your research and development projects qualify, then the team at Butt Miller can help. We have the expertise to identify your qualifying activity and can guide you in making a valuable R&D tax credit claim.
What is research and development (R&D) tax credit?
The R&D tax credits scheme is a government incentive designed to reward small businesses for investment in innovation. That includes any projects undertaken by companies in order to develop new products, processes and or services, or to make enhancements to an existing product, process or service.
There are currently two schemes to reward UK businesses. SMEs can make a tax credit claim worth up to 33p per pound on eligible expenses as part of the R&D tax credit scheme. The relief is available as either a corporation tax deduction or, in certain circumstances, a payable credit.
Large companies (generally, one that has more than 500 employees) can claim relief through the Research and Development Expenditure Credit (RDEC) regime.
What types of projects qualify for research and development tax credits?
R&D tax credits apply to any project that is concerned with a scientific or technological advance. HMRC have a specific definition of what qualifies as R&D:
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D”
In order to show that a project is R&D within the strict tax definition, you must be able to demonstrate that:
- a scientific or technological uncertainty exists
- your R&D activity is designed to overcome the uncertainty
- why the solution is not readily deducible by other competent professionals
It’s worth noting that it is not necessary that your project was successful at reaching a solution to the problem it set out, just that it made adequate efforts to solve it.
Is my business eligible for R&D tax credit?
R&D tax credits are available to small businesses in any sector that carry out research to further their field – not only to the scientific and engineering industries, as you might think.
Eligible businesses include software developers, food and drink businesses, retailers wholesalers and even professional service providers.
At Butt Miller, we see too many companies miss out on valuable R&D tax relief. We can help you to identify your qualifying research, give advice on what costs qualify and how to go about making a tax credit claim.
Eligible R&D costs for corporation tax relief
Only specific costs incurred for R&D projects are classed as eligible expenditure. Qualifying expenditure is the same for both a small and large company and includes:
- Direct staff costs. For staff actively engaged on the R&D project you can claim a proportion of their salaries, wages, class 1 National insurance, reimbursed expenses and pension contributions.
- Subcontracted R&D and externally provided workers. You can claim 65% of the relevant costs of using a subcontractor for your R&D activities.
- R&D consumables. You can claim for relevant proportions of materials used, eg. to build prototypes, and also on utilities such as water and fuel.
- Software. This includes software acquired to be used directly and partly in R&D activities.
- Clinical trial volunteers. If you operate in the pharmaceutical industry, you can claim payments made to volunteers involved in clinical tests for qualifying R&D projects.
R&D tax credits – ineligible costs
It is important not to fall foul of the strict rules put in place by HMRC as to what qualifies as eligible expenditure. Ineligible expenses include:
- The production and distribution of goods and services
- Capital Expenditure (although some items may be eligible for R&D capital allowance)
- The cost of land and buildings
- The use of/or creation of a trade mark or patent
- Marketing
- Rent or rates
What is the accounting treatment for R&D?
For a R&D tax credit claim, the accounting treatment is straightforward; the tax credit received is not taxable income and is shown in the company’s income statement.
For large companies, the credit you receive under the RDEC scheme is classed as taxable income and is shown as ‘other income’ and the tax payable in the income statement.
How Butt Miller can help you with R&D tax credit claims
Our chartered accountants and tax advisors have a wealth of experience and can advise you on all the ins and outs of R&D tax credits. Expert advice is just a few clicks and a phone call away, so why not stop Googling and allow our advisors to help you move forward with certainty?
During our 20 year history, we have seen too many small business owners miss out on what they are entitled to. That is simply not acceptable to us, and we will ensure that you make the R&D tax credit claim you deserve, in order to move your business forward.
We can help you by producing R&D tax credit claims that are fully maximised and stand up to HMRC investigation.
To discover more about R&D tax credits and the other tax services we offer, please get in touch.
Check if our frequently asked questions can shed more light
What research and development scheme am I eligible for?
Which government scheme you are eligible for is determined by the size of your company.
What is a classed as small business for R&D purposes?
To claim R&D Tax Credits using the SME scheme, companies must:
- Employ no more than 500 members of staff
- Have a turnover of under €100m
- Have a balance sheet under €86m
What is classed as a large company for R&D purposes?
In the context of the RDEC scheme (formally Large Company Scheme), a large company has over 500 employees or more than £100m turnover.
How R&D tax credits work for SMEs?
Small or medium-sized enterprises (SME) R&D tax relief allows companies to:
- deduct an extra 130% off their qualifying expenditure from their yearly profit. As well as the normal 100% deduction to make a 230% total tax deduction
- or if they are loss making, a cash repayment is available providing the company as a going concern. Tax credits are worth up to 14.5% of the loss arising from the R&D deduction
What kind of company qualifies for R&D tax credit?
All UK companies are eligible, and the definition of R&D is deliberately broad so all industries can use the same criteria. You must be a tax paying limited company in the UK to qualify.
How do I claim R&D tax relief?
You can make a claim for R&D tax credits up to 2 years after the end of an accounting period. The claim is made by entering the enhanced expenditure into the Company Corporation Tax return (Form CT600) to reduce your taxable profits, thus reducing your tax liability.
If you make a trading loss, and have no tax liability you can choose to surrender this cash credit and claim cash payment.
How do you calculate R&D tax credits?
There are three stages in working out your R&D tax credit claim:
- First you must calculate your allowable expenditure for research and development activities. If the expenditure incurred was not solely for R&D purposes, then you must calculate it as a percentage. For example if your staff spent 60% of their time on R&D and 40% on their core duties, then you can claim 60% of the associated staffing costs.
- Once you have calculated your allowable expenditure, you must multiply it by the R&D rate, (currently 130%) and add the two together to get your enhanced expenditure figure.
For example:
- Allowable expenses = £30,500
- Multiplied by 130% = £39,650
- Enhanced expenditure = £70,150
- The last step is to enter the enhanced expenditure figure into the company tax return.
Loss making SMEs that prepare their accounts on a going concern basis may choose to claim a payable tax credit of up to 14.5% of the R&D loss surrendered.
If you make a trading loss, and have no tax liability you can choose to surrender this cash credit and claim cash payment.
Does the Research and Development Expenditure Credit scheme (RDEC) apply to SMEs?
The RDEC scheme exists for large companies, and SMEs primarily use the R&D tax credit scheme. However, small companies can claim RDEC if they have been subcontracted to do R&D work by a large company or have received a notified state aid or subsidy for their R&D project. The current RDEC rate is 13% (before tax).
What type of project qualifies for R&D tax credits?
Under the R&D scheme, qualifying projects are classed as those that set out to advance scientific or technical knowledge. For a limited company, this may be to develop new products, processes and or services, or by enhancing existing ones.
Companies must prove that a scientific or technological uncertainty existed, how their project set out to solve it and why others in their field could not have reasonably come to the same conclusion.
