Quick Guide to Research & Development (R&D) Tax Relief

research and development

Innovation is the cornerstone of successful businesses and economies. All over the world, governments try to help create an environment where businesses can conduct this kind of innovative research. In the UK, R&D tax relief is one way the government aims to do that. Here’s a quick guide to what it’s all about and how your business could benefit from it.

What counts as R&D?

R&D projects are an important part of a company lifecycle. The purpose of R&D projects is to achieve a technological or scientific advantage, with the aim of the project focused on:

  • Creating a new product
  • Changing or improving an existing process

In essence, your company is engaged with R&D if you’re undertaking a project to solve a problem no one has yet solved or to create something completely new. R&D projects tend to be costly and they often require people with significant formal qualifications to complete due to the complexities involved in the process.

For business, it can be hugely beneficial, as it could lead to new products and better market share. On the other hand, the uncertain nature of R&D means it can be time-consuming and costly. That’s why the ability to get help with the cost side of things can be important and encourages more SMEs to venture into these projects.

What is R&D tax credit?

R&D tax relief is a tax break that allows a business to reclaim up to 33% of its R&D costs. The reclaim is available even if the project you put money into failed. It’s important to note that the 33% relief is only available to SMEs, with larger companies able to claim up to 10% of their R&D costs under a slightly different scheme. To qualify for the SME R&D tax credit, your business should have no more than 500 employees and you need to meet one or both of the following conditions either in the current or previous accounting year:

  • Annual turnover of no more than £100 million
  • Balance sheet no more than £86 million

The relief is paid as a corporation tax refund or as a negative corporation tax. Businesses can receive it at the end of each financial year, tax free. A big benefit of it is how you are free to use it to almost anything – you can hire more people for the project or use it to buy equipment and so on.

In a nutshell, the process looks like this:

  • Your business invests money in R&D
  • You then make an R&D claim
  • You get to reclaim up to 33% of the costs at the end of the financial year

The precise calculations regarding how much a business can claim can be complicated. As a general rule of thumb, a profitable SME can expect to claim about 25% of the R&D costs. If you’re making a loss, it’s close to 33% and if you’re breaking even, the refund can drop to 15%.

How can a company qualify for R&D tax relief?

R&D projects that qualify for the relief have to meet HMRC’s detailed criteria. The business must be a UK company to claim the relief and be involved with R&D. As explained above, R&D usually refers to projects that lead to an advance in science and technology but this can be rather hard to interpret in some cases.

A good way of thinking about it is to examine the project with the following criteria in mind:

  • Does your project have a certain technical outcome? If so, then it’s probably not R&D. Technical uncertainty is a component of most R&D projects.
  • Does your project achieve something that few others have achieved? Then it’s probably R&D, as innovation is an important part of the equation.

Aside from the project meeting the technical requirements, your business must also spend money on it. There isn’t any clear limit in terms of how much money you have to spend to be eligible to claim. However, the money should be spent on:

  • Staff (PAYE)
  • External contractors or subcontractor
  • Materials consumed in the project
  • Software licences (excluding hosting)

The money could have been spent within the last two completed financial years. So an R&D tax credit claim can be made up to 36 months from the start of the project.

How to apply for the R&D tax relief?

Applying for the tax relief isn’t complicated but it can take a bit of time. The most time-consuming part of the application is often the Technical Narrative. This written document proves your project qualifies for the relief and includes detailed calculations outlining why you’ve claimed a certain amount. Your Technical Narrative needs to outline the project’s purpose, approach, application and outcome. The more details of the project you can show, the better it will be.

Once you have the Technical Narrative under wraps, you also need to fill and file the CT600, which is simply the Corporation Tax for Company Tax Return form. Ask a specialist to help or browse through the HMRC guide.

As mentioned, the deadline for submitting your claim is two years of the end of the relevant accounting period.

Get help with for your R&D tax credit claim

It’s important to get your application right because problems in Technical Narrative could lead to an inspection. This could delay your claim by a few months or, at worst, result in penalties for misfiling.

That’s why it’s a good idea to seek professional guidance. We at Devonshire Green can help you in writing the report or filing the CT600. Our specialists work closely with SMEs and have worked on numerous R&D cases that have led to successful tax relief claims. Contact us today to find out whether your R&D project qualifies for the claim and let’s help your business run smoother.