Research and Development Tax Credits can be a valuable asset for a business looking to grow and capitalise on research projects.
Darren Griffin is an associate director at RSM in Liverpool. Darren specialises in R&D tax credits and patent box, helping companies realise significant tax savings – we asked him to breakdown some common questions around R&D.
In a nutshell, what are R&D Tax Credits?
R&D tax relief can either reduce a corporation tax liability and/or offer a cash repayment, even where a company is loss-making.
It is a means of investment by the Government aimed at encouraging innovation in science and technology, creating skilled jobs and forms part of the incumbent Government’s drive to create a low corporate tax base in the UK.
The definition of R&D is wider than you may think and covers any situation where you have sought a scientific or technological advance above the existing baseline and faced scientific or technological uncertainty in doing this, such as, new or improved products, new technological processes; or leading software development. We see R&D in almost all sectors and industries, so R&D should always be considered.
There are two regimes available: one for small and medium-sized enterprises (SME) and another less generous one for large companies. There are specific tests in determining size, but a SME is generally a company or group with less than 500 employees.
What benefits would a SME gain from claiming R&D Credits?
The benefits of the two R&D regimes, for every £1 of qualifying expenditure, are broadly:
- SME - Tax paying company 25p; Loss-making company up to 33p for every £1; and
- Large – 10p.
Are all types of businesses eligible for making a tax claim?
No. The relief is only available to companies. This includes corporate members of a partnership.
What R&D costs could a company claim for?
Qualifying expenditure must be in respect of qualifying activities and revenue in nature, ie expensed to the profit and loss account. There are specific rules enabling development costs capitalised as intangible fixed assets to be claimed.
Qualifying expenditure includes:
- staffing costs excluding benefits-in-kind;
- consumable items including materials and utilities;
- software licences;
- certain subcontracted activities;
- externally provided workers – agency staff or staff provided by a connected company; and
- contributions to independent research.
There are specific rules attached to each area of qualifying expenditure.
If a business has external investors, does this impact a right to claim?
This can impact the regime a company can claim under. Where enterprises that are not SME own 25 per cent of the capital or voting rights of the company or group then it may mean the company can only claim under the large regime. Detailed rules apply in this area.
How best would a business go about pursuing a claim?
HMRC has a specific manual providing guidance, which is the best place to start before pursuing a claim.
Claims must be made in the corporation tax return for each year and ideally supported with a report. Seeking external advice, particularly in the first year, is a good idea as the rules are complex and HMRC is likely to challenge claims which are not adequately supported.
Drawing on experts will help to explain the definition of R&D for tax purposes and draw out what the company has developed.
In terms of making a claim, a report detailing the company’s qualifying activities and how it has calculated its qualifying expenditure will need to be prepared. This is submitted to HMRC to support the claim and aims to answer any questions which HMRC may have upfront.
Qualifying R&D expenditure can be worth big money. Companies should make the most of this generous tax relief now by seriously challenging their own pre-conceptions and questioning their eligibility to make a claim. This could really make a difference to a company’s bottom line.