Everything You Need to Know About Claiming Tax Relief for Research and Development
What are R&D Tax Credits?
R&D Tax Credits are a form of tax relief set up by the UK government to encourage businesses to aid growth of the UK economy by investing in research and development. The idea behind the scheme is that businesses get rewarded for their innovation efforts, finding new solutions to their biggest challenges and improving/enhancing their products and processes. The desired result is that this will then accelerate growth, creating more job opportunities and increasing the value of the UK economy.
How R&D Tax Credits Work
R&D Tax Credits work by allowing businesses to make a claim to HMRC to obtain a tax relief for the money they have spent on qualifying research and development projects. However, R&D Tax Credits are more than just a standard tax relief – the amount of your approved claim can be paid to you in three ways:
- cash payment,
- deduction applied to your year-end Corporation Tax bill,
- or a mixture of the two.
It is worth noting that the way in which you receive the relief is based on whether you are profit-making or loss-making. If you have made a loss, you can claim a cash payment. If you’ve made a profit, you can offset the value of your approved claim against your Corporation Tax bill. If the value of your claim is more than the CT due, then you can opt to receive the unused claim funds as a cash payment.
Benefits of R&D Tax Credits
The most obvious benefit of being able to make an R&D Tax Credit Claim is if you qualify, you are in effect, reclaiming some of the cost of your qualifying project. However, there are plenty more benefits which are often not realised:
- You can make a claim every year – yes, that’s right. Every tax year, as long as you meet the criteria and your project qualifies, you can submit a claim.
- You receive a cash payment if you make a loss – if, when your accounts are completed, you have made a loss for the year and there is no Corporation Tax due, you can opt to receive the value of your claim as a cash payment into your business bank.
- You can reduce your tax liability – if your accounts have resulted in Corporation Tax based on profits made during the corresponding financial year, you can use the value of the approved claim to reduce the amount you pay. And, what’s more, you can also use the funds to settle any outstanding tax debt with HMRC.
- You receive contributions towards vital innovations – most businesses are aware of what needs to change within their business and have ideas on how to do this. With R&D Tax Credits, businesses receive a contribution as such towards making these changes.
- Grow your business due to the cash incentive to innovate – your business can continue to grow because the overall cost of the original project will be reduced when a claim is satisfied. This results in more cash available to invest in other areas – or indeed future R&D projects.
- More freedom to test and research without wasting money – with R&D Tax Credits, you have a bit of a safety net. You can almost test the project first to see whether it will make a difference. For example, imagine you want to launch a new version of an existing product. You could just go straight in and invest in the development of loads of these products and the funds to bring them to market. But, thanks to the help of Tax Credits, you can invest in extensive research, testing and prototyping of the product and be rewarded with a tax relief for doing it. This is therefore stopping you from potentially making a costly mistake.
Basic Eligibility Criteria
Like most forms of Tax Relief and Government incentives, R&D Tax Credits comes with its own set of eligibility criteria.
To be eligible to make a claim, you must first ensure you are:
- A limited company based and registered in the UK which is subject to Corporation Tax.
- Not in receipt of state aid totalling more than £7.5million.
- Not in receipt of grants totalling the full amount of your project.
- Involved in projects which seek to resolve either a scientific or technological issue/uncertainty.
That being said, even if all of these criteria are met, you may not have your R&D Tax Credits Claim approved. Your project has to meet a specific set of criteria too.
R&D Project Criteria
As we’ve already touched upon, for a project to be considered an R&D project, it must be part of a specific project designed to “make an advance in science or technology” and solve an uncertainty in either of this fields. This means not only does it help your business, but it aims to have a positive impact on your entire industry. This is why all projects you intend to claim for must relate to your own industry/trade or one which you intend to start up based on the results of your project.
For a project to qualify as R&D, it must also have results that haven’t been discovered already by a professional working within the same field. It’s fine if a competitor has done something similar, but if you have developed something which is significantly better and solves scientific or technological uncertainty, then the chances are your project qualifies for R&D.
Note, your project will not qualify if it relates to an advance within Arts, Humanities or Social Sciences – including economics.
The government deliberately made the definition of R&D quite broad to allow for true innovation, but despite it being broad, there are generally two circumstances where a project becomes R&D:
- Creating a new product, process or service – or attempting to
- Making an existing product, process or service better – or attempting to
We note ‘attempting to’ as a project does not need to have a successful outcome to qualify as R&D, as long as there is justification as to how it tried to solve an uncertainty/make an advance.
One of the most common difficulties we see arising is figuring out where R&D begins and ends. Often, people consider the start of a project to be when the idea is brainstormed and generated, but in fact, it doesn’t become R&D until the process of determining whether it could be successful has commenced. Similarly, the point at which R&D ends is commonly thought to be when the product or service is launched, however, the end point usually occurs just after testing, when the project is determined a failure or a success.
When we look at specific activities, the most commonly occurring in approved R&D Tax Credit claims are:
- Production Trials
- Process/Design/System development or evaluation
- Planning – specific to the R&D project
- Admin and support – specific to the R&D project
- R&D project training
- Market research, feasibility studies, research
- Design analysis, adaption and optimisation
If you think back to the points on where R&D begins and ends, it will help you to decide whether a project activity you are undertaking will qualify.
Qualifying Project Costs
An important thing to note is that even if your project as a whole meets the criteria to be classed as R&D, it doesn’t mean every single cost associated with it can be claimed as R&D Tax Credits.
The table below lays out some of the most common costs you can claim for.
|Software||The software you use during your R&D projects can be included in your claim. However, if this software is used normally within the business, you’ll need to make an adjustment and calculate how much of the software cost would cover the R&D specific usage.|
|Consumables||There are certain consumable items that you are allowed to claim for, such as power, water, hardware and materials etc. However, attributing these correctly to your R&D projects can be quite tough. HMRC has created an advice article detailing the rules surrounding consumables claims. Have a read!|
|Prototypes||Actual prototypes – not prototypes made for sale or commercial purposes – but prototypes made purposefully to try and resolve your scientific or technological uncertainties can be claimed for. It’s worth noting though that they can never in any circumstances be sold at a later date.|
|EPWs||Sometimes you may need to a enlist the help of a third-party company which supplies workers to you that can work specifically on your R&D project. If these workers only work specifically on the project, you may be able to claim up to 65% of the costs paid to the provider.|
|Costs for volunteers of Clinical Trials||Those in the pharmaceutical sector are usually required to conduct clinical trials as part of their R&D efforts. Obtaining volunteers for these trials can be costly, especially when it comes to first attracting the volunteers and then compensating them for their involvement.|
|Subcontractors||If you’re applying under the SME scheme, you can usually claim for 100% of the payments made to subcontractors. However, HMRC determines that to get 100% the subcontractors must be a connected party, otherwise, you can only claim 65%.|
|Staff costs||If you have employees who are directly involved with the R&D project, then you may be able to claim some of their costs. This includes their salaries, pension fund contributions, NI etc.|
|Research contributions||If you’re a large company which uses a third party to conduct research on your behalf which is directly related to R&D, then you may be able to claim for the cost of it. There are certain criteria that the third-party researchers must meet, so it’s worth checking the guidance beforehand.|
NEW FOR 2023 – From April 2023, the government has announced it will be allowing for claims to include the cost of Pure Mathematics and Cloud computing and data. Further information can be found here.
Making a Claim
Choosing the Right Incentive
Before you begin to make a claim, you’ll need to establish the incentive that is right for your business. There are currently two incentives:
- SME Tax Credit Incentive: An incentive for SMEs with less than 500 employees, a turnover of less than £100million or £86million in gross assets.
- Research and Development Expenditure Credit: For those who do not meet the criteria for the SME Tax Credit incentive. Or those who do but they have other excluding factors such as grants and subcontracting.
In most cases, claims are made through the SME Tax Credit Incentive, so it’s likely that’s where you’ll fall if you’re making a claim. However, it’s worth consulting a specialist who can confirm before you proceed with making a claim to ensure unnecessary rejection is prevented.
Forms to Make a Claim
Claims for R&D Tax Credits are made on an annual basis via your Company Tax Return, but an additional file called the single iXBRIL computations file also needs to be completed. If you are claiming a payable amount instead of a tax deduction, you will also need to complete the supplementary form CT600L.
If your accounting period begins on or after 1 April 2023, you may need to also submit a notification to HMRC in advance of making a claim that you will be submitting one. You can check if this applies to you here.
From 1 August 2023, new rules come into effect stating that for every claim, additional information must be provided about the claim before a Corporation Tax Return is submitted. There’s a lot of information which needs to be provided, including details of each project and what makes them qualify as R&D. As an overview, you’ll need to:
- Explain how your project looked for an advance in your field.
- Explain how your project had to overcome the uncertainty.
- Explain how your project tried to overcome uncertainty.
- Explain how your project couldn’t have been easily done by another professional in the same field.
Of course this is a very general overview, so it’s worth spending some time reading the official guidance here https://www.gov.uk/guidance/submit-detailed-information-before-you-claim-research-and-development-rd-tax-relief.
Calculating The Value of The Claim
From 1 April 2023, the amount that businesses in the UK can claim as R&D Tax Credits has changed due to a decrease in the rates used in calculations.
Previously, under the SME scheme, there was a 130% deduction rate on costs for profit making SMEs against their tax liability, and loss-making SMEs could claim tax credits to the value of 14.5% of their R&D losses. Now, the deduction rate has dropped to 86% and the loss rate to 10%.
Those claiming via the RDEC scheme could previously claim 11p tax credits on every eligible pound they spent on R&D due to the rate being 13%, but now they will be able to claim more due to the rate increasing to 20%.
There are two types of expenditure you’ll need to calculate when making a claim. The first is qualifying expenditure, which is the amount which you are eligible to claim for based on the criteria and rules around what can be claimed. The second is enhanced expenditure, which is the enhanced amount of relief that you will be entitled to, based on how much you spent on R&D.
To calculate enhanced expenditure, you’ll need to:
- Work out the costs directly associated with the R&D project you’re claiming for
- Reduce any costs that were for subcontractors or external worker providers by 65%
- Add the costs together and multiply by 85%
- Add the 86% figure to the original amount of qualifying costs.
The final figure will be the value of your claim.
Making a claim is a complex process and one which must be correct at every stage. Any errors or attempts of fraud will result in an investigation by HMRC. That’s why we recommend always using a professional who has experiencing in the entire process of making an R&D Tax Credits Claim.
If you’d like assistance from our specialist team, please reach out to email@example.com.
Frequently Asked Questions
How far back can I make an R&D claim for?
The current guidance states that R and D Tax Credits can be claimed up to two years after the end of the relevant accountancy period.
Is there a limit to how much refundable R&D Tax Credits I can claim?
From 1 April 2021, there is a cap on the amount of payable R and D Credit you can receive as an SME, which is £20,000 plus 300% of your total staff related tax liability in the same accounting period.
Can I claim if my project has not finished or has failed?
In short, yes. If you meet the eligibility criteria and your costs fall into the financial year you want to claim for, then a claim can be made. The scheme rewards innovation and the investment companies make for technological advancements therefore the intent matters and not the outcome.
Can a sole trader of charity claim R&D tax credits?
No, only limited companies liable to UK corporation tax can claim through the scheme.
Can I make a claim for an overseas project?
If the company is paying UK corporation tax the location of the qualifying R&D activity does not matter.