If your UK company is working on innovative projects in science and technology, and you have spent money on this, you may be able to claim a Research and Development tax relief (R&D tax relief) from the UK government. The purpose of R&D tax relief is to incentivise companies to increase their R&D spend. Research and development tax credits can be complex so this article aims to help UK companies and startups understand what R&D tax relief is, what qualifies for an R&D claim and the R&D tax credit claim process.
What is R&D tax relief?
An R&D tax relief can be granted to companies carrying out work that qualifies for R&D relief. The tax relief can be given in the form of a reduction of the current or future corporate tax bill or in the form of a payable tax credit if the company is loss making. The amount and type of relief a company will claim will depend on its size and whether it has been subcontracted for the R&D project.
Small and medium sized enterprises (SME scheme) with less than 500 staff and a turnover of under 100 million euros or a balance sheet total under 86 million euros can claim SME R&D relief. This type of relief allows eligible SMEs to:
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction which will effectively reduces a company’s taxable profits.
- claim a tax credit in the form of a cash payment if the company is loss making, worth up to 14.5% of the surrenderable loss.
A company has a surrenderable loss if it makes a trading loss in an accounting period.
Large companies can claim a Research and Development Expenditure Credit (RDEC scheme) for working on R&D projects which is currently 13% of your qualifying R&D expenditure.
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What qualifies for an R&D claim?
R&D Projects which advance science and technological fields related to a company’s trade can be eligible for R&D tax credits. To make a successful R&D claim a company will need to explain how a project:
- looked for an advance in science and technology
- had to overcome technological uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
A qualifying R&D project may research or develop a new process, new product or service or improve on an existing one.
The R&D activity costs which companies can claim relief for are:
- some direct R&D costs such as staff costs, payments for externally provided workers and for clinical trial volunteers, and the cost of software and consumable items
- certain payments for subcontracted R&D activities – those made to individuals or partnerships of individuals or to charities, universities, and health service bodies
- contributions made to charities, universities, and health service bodies for their own research
- SMEs can also claim relief for payments for subcontracted R&D activities in general (the amount they can claim will depend on whether they are connected with the subcontractor)
A company can’t claim the costs for:
- the production and distribution of goods and services
- capital expenditure
- the cost of land
- the cost of patents and trademarks
- rent or rates
Under the current rules for both the RDEC and SME scheme, UK companies are able to claim relief on R&D activity that is conducted overseas. In the government’s November 2021 tax reliefs report, companies will only be able to claim relief on qualify R&D activities conducted within the UK.
How to claim R&D tax relief?
A company can apply for advance assurance before making and R&D tax relief claim to HM Revenue & Customs (HMRC). A successful advance assurance application will give a company a guarantee that any R&D claims will be accepted if they are in line with was discussed and approved by HMRC and claimed within the first 3 accounting periods.
An advance assurance is not required to make an R&D tax relief claim.
The R&D tax claim process is to first calculate the allowable expenditure for the R&D work which was carried out for the qualifying activities. The next step for SMEs is to obtain the enhanced expenditure amount by multiplying the allowable expenditure by 230%. The enhanced expenditure amount for SMEs and allowable expenditure for larger companies should then be submitted in the R&D section of the company tax return.
An SME claiming a tax credit repayment will need to calculate the payable tax credit by multiplying the enhanced expenditure amount by the payable tax credit rate. HMRC aims to deal with 95% of payable tax credit claims within 28 days of receiving the claim.
R&D tax reliefs are a great tax incentive for companies in the UK to advance their technology as it allows them to recoup a portion of their R&D costs. To claim the right amount, companies must determine their qualifying R&D activities and the associated costs they can claim. To ensure that the intellectual property rights of your R&D projects are properly secured, it is important to have robust employment and consultancy service agreements in place. To create lawyer-approved contracts which protect your intellectual property cost-effectively, sign up to Legislate today.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.