Introduced in 2000, the Research & Development (R&D) tax credit scheme is a HMRC backed incentive which enables companies to receive a tax deduction or cash payment when costs are incurred developing new products, processes or services.
The biggest misconception appears to be what constitutes R&D activities with many business owners assuming that a qualifying project must be groundbreaking work carried out by people in white coats in a laboratory. However guidance defines R&D as ‘a project that seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainties’.
The two key criteria when determining whether your company is eligible are ‘advancement’ and ‘uncertainty’. If your company and the project both meet the necessary criteria then it is possible to claim relief on revenue expenditure and in some cases capitalised revenue expenditure across three main areas including staff costs subcontractors/freelancers and consumable items.
Examples of projects that have successfully qualified for R&D tax reliefs include:
- Development of bespoke software systems for businesses
- Development of improved strains of crops, plants, or livestock with greater protection from disease
- Researching suitable materials for use in clothing and products
- Innovative architectural and engineering projects such as retractable roofs and sound proofing.
Is it worth claiming?
Under the Small and Medium Enterprise (SME) scheme, the most generous R&D tax relief allows an enhanced deduction of up to 230% for qualifying costs in a company’s tax return, significantly reducing its corporation tax bill. It is also possible for a loss-making SME company to instead claim a cash credit of 14.5% on the enhanced qualifying costs.
Larger companies (groups with over 500 employees and breaching certain financial thresholds) are eligible for the R&D expenditure credit which gives a pre-tax credit of 11% on qualifying costs equating to a net benefit of 8.9% to the company. This credit is accounted for as operating income improving the financial position of the company in its accounts. Another significant benefit is that if a company is loss making, the net benefit can be surrendered for a cash payment from HMRC.
As you would expect HMRC scrutinise all R&D tax claims carefully so it is advisable to contact an expert beforehand. Supporting documentation should also be submitted to HMRC with R&D tax claims as this significantly improves a company’s likelihood of the claim being processed efficiently.