June 7, 2021
What is Research & Development tax relief, and can I claim it?
What is Research and Development?
Research and Development (“R&D”) tax relief is an HMRC incentive to reward UK companies for investing in innovation and provides generous amounts of tax relief and tax credits for those businesses to continue their R&D, recruit new staff and ultimately grow the business.
Companies that spend money developing new products, processes or services; or enhance existing ones become eligible for R&D tax relief.
Many often relate R&D to tech companies, however R&D happens in every single industry and the scope for identifying R&D is wide, the guidance on claiming may appear broad however the point being that every R&D claim is different for every single company. The key is enhancing or creating a new product, process or service that could potentially generate income or save costs in your business. The R&D does not have to be successful in order to claim the tax relief.
For new start ups or businesses planning on starting to be innovative, the tax relief and credits can be built in to a cashflow which will allow you to make more informed financial decisions and could potentially be the difference from the project becoming a success from a failure.
Can I claim?
Let’s keep in simple, to claim you need to tick all of the following three criteria:
• Be a limited company in the UK that is subject to Corporation Tax.
• Have carried out qualifying research and development activities.
• Have spent money on these projects.
What can I claim?
The guidance is quite clear in terms of ‘qualifying expenditure’ and these are broken down as follows:
• Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
• Subcontractors and freelancers.
• Materials and consumables including heat, light and power that are used up or transformed by the R&D process.
• Some types of software.
• Payments to the subjects of clinical trials.
To calculate your R&D enhanced expenditure you need to identify qualifying expenditure and enhance it by the relevant rate, which are as follows:
• SMEs – 230%. For example, if you spend £100,000 on ‘qualifying expenditure’, a total amount of £230,000 becomes deductible from taxable profits, so an additional £130,000 on top of the original £100,000.
• Larger Companies – 130%. For example, if you spend £100,000 on ‘qualifying expenditure’, a total amount of £130,000 becomes deductible from taxable profits, so an addition £30,000 on top of the original £100,000.
If your company has been undertaking qualifying R&D and has not yet claimed R&D relief, you may make a backdated claim within the anniversary of your filing date — generally two years after the end of the accounting period.
How to claim?
If you are eligible, you can either receive a cash payment and/or Corporation Tax reduction.
When you deduct your enhanced expenditure from your taxable profits, or add it to your loss on your Corporation Tax Return, this will result in:
• a Corporation Tax reduction at 19% if you are profit-making.
• a cash credit (SMEs 14.5% of the loss relating to R&D, large companies 13% of the loss, subject to restrictions)
• Or, a combination of the two.
Which R&D tax credit incentive is right for my business?
What incentive you use to make an R&D tax credit claim will mainly depend on whether you are an SME or a large company.
• Fewer than 500 staff and;
• Either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.
• 500 staff or more and;
• Either more than €100 million turnover or €86 million gross assets.
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax incentive. And if you are a large company, via the Research and Development Expenditure Credit (RDEC).
However, there are a few factors such as grants and subcontracting that can restrict an SME from accessing the SME incentive. This means you may need to make a claim via RDEC – or via both incentives.
A new measure limits the amount of payable R&D tax credit (the 14.5%) which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
A company is exempt from this from this cap if:
its employees are creating, preparing to create or managing Intellectual Property (IP) and
it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons
At DIGI we undertake the full process from start to finish for claiming R&D tax reliefs and credits within your innovative business.
With our knowledge and experience we will ensure you claim every penny you are entitled to claim in order for you to continue to reinvest the money and be innovative.
At DIGI we want to work with innovative companies and we truly want you to reinvest the money into your business to enhance your growth, therefore we agreed a fixed fee beforehand which is competitive and you are truly in the hands of accountants who want the best for your business and its future growth.
Call: 0161 250 7500
All information is correct as at 7 June 2021.
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