Every year innovative businesses claim millions of pounds back in the form of R&D tax credits.
No matter what industry your business operates in or how big your company is, it’s worth looking into whether or not you can benefit from the government’s SME R&D tax credit scheme.
In this guide, we’ll take a look at what R&D tax credits are, give some practical advice on how to apply for them, and answer some of the most common questions about the process.
What does my business need to do to claim R&D tax credits?
Generally speaking, under HMRC’s rules your business has to be engaged in working out the answer to some kind of “scientific or technological uncertainties” in order to claim R&D credit.
Of course, this is a rather nebulous concept – so there are plenty of possible ways you can gain R&D relief.
If you produce a new product, for example, it’s possible that you will be able to claim for some of the research that went into it. The same goes for companies who create a new service or process – so if you’re not in the manufacturing business, you may still be able to claim R&D credit.
And remember, if your research and development efforts cover changes made to a product (or, again, a service or product) you developed previously, this can also be considered a candidate for your R&D allowance.
There are a couple of important caveats, too, both of which widen the pool of beneficiaries when it comes to the R and D tax credits rules.
Firstly, agencies or providers who carry out one or more of the required actions described above on behalf of their clients may still be able to claim R&D tax credits. In addition, it doesn’t matter if your attempts at research and development were successful: there’s still a chance you can claim a research and development credit even if it didn’t work out, so make sure to keep all your documents and evidence in order to make a claim.
What costs can I claim back?
As a business looking to maximise your R&D tax relief, it’s likely that you’ll be wondering what costs you can claim back when it comes to R&D.
The definition developed by HMRC means that there are several choices when it comes to claiming R&D tax relief. If you can demonstrate, for example, that your spend on payments for staff, subcontractors or other workers (including crucial employer costs such as pension contributions) went towards research and development costs then you’re in luck.
You’re also able to apply for R&D tax deductions on the basis of your spend on materials as well as your staff costs. For example, any spend you make on vital commodities (such as power costs, or any basic needs for your factory or workspace, or any heating costs incurred as a result of R&D) can be claimed as a cost, so it’s worth making the most of it.
For those companies with a more modern, technological twist, meanwhile, the rules governing R&D tax credit claims are also applicable to certain types of software.
What are the R&D tax credit rates?
For those SMEs (small to medium enterprises) which are eligible to make R&D tax credit claims, there are a lot of savings to be made. Even those making the average R&D tax credit claim are benefitting from this tax rule, so it’s worth looking into.
Provided you fit the definition of an SME for this purpose (under 500 staff members combined with a balance sheet of under €86m or a turnover of under €100m), it’s likely that you’ll be able to take another 130% of your qualifying costs from your total annual profit as part of the R&D tax service – in addition to the 100% deduction you’d normally be entitled to.
In the event that your company hasn’t made a profit, you may be able to surrender your losses to HMRC in exchange for an R&D tax credit (in other words, money). The R&D tax credit rates are generous, giving you cash at a rate of 14.5% of your surrenderable loss. This can therefore mean you receive up to 33.35% of your R&D spend back from HMRC as cash, which can be extremely valuable if you are in a tricky financial situation.
What’s the research and development expenditure credit (RDEC) scheme?
When it comes to claiming under the government’s SME R&D tax credit scheme, larger companies may find themselves pushed into the RDEC scheme – which is a tax credit for 11% of all of your qualifying research and development spend. It’s worth keeping in mind that this tax credit is going up to 12% soon, providing even more value for your business.
It’s not always apparent whether you’ll be a part of the SME scheme or the RDEC scheme when making R&D claims, and often you’ll need the services of an independent consultant to help you work out which category your business falls into before making R&D tax credit claims.
Factors that affect R&D claims
There are a number of factors that can affect a claim, which are as follows. Whether or not you carried out the work as a subcontractor can be a factor, and many businesses wonder how this status will affect their claim. In the event that the R&D work carried out by your company was for a large business, it’s likely that you’ll get pushed into the RDEC scheme to get your research and development credit.
Other factors which can come into play here include where your business is based, whether or not your business earned most of its income in the UK or further afield, and whether or not your business got some help from a grant in order to tackle the R&D problem concerned.
What is the minimum expenditure for an R&D tax credit claim?
There is no minimum expenditure on qualifying R&D required in order to make a claim for a tax credit. This wasn’t previously the case; until 1st April 2012 it was necessary to spend at least £10,000 on qualified research and development projects to be eligible for a claim. Today, you can make a claim for R&D tax credits. However, for the purposes of assessing true R&D activity in the context of government R&D tax credit claims, spend of over £3000 tends to be viewed as qualifying spend. Smaller amounts are likely to suggest that the project wasn’t necessarily true R&D because of the sizeable nature of such projects and the costs involved in hiring the experts needed to develop new solutions to existing problems, as well as software and materials, for example.
Can SMEs claim for R&D tax credits?
Yes, SMEs can claim research & development (R&D) tax credits, provided that the following conditions are met:
- They are subject to UK Corporation Tax
- The company is a going concern and not going into administration
- The SME’s balance sheet meets monetary thresholds
- The SME delivers a trade which relates to R&D activities that it seeks to claim for
- No other subsidies or grants have been granted in respect of R&D spendingIt is always encouraged to seek legal advice if you are unsure whether or not your business is eligible for R&D tax credits. Our team can help you to assess your eligibility for R&D tax credits and grants, along with other types of public funding that is available to UK businesses for R&D development activity.
Can an LLP apply for R&D tax credits?
In most circumstances, Research and Development (R&D) tax credits are only on offer to companies subject to UK Corporation Tax. As Limited Liability Partnerships (LLPs) do not pay this tax, they typically cannot claim under the R&D tax credits scheme. This is because R&D tax credits apply a tax relief figure to Corporation Tax. However, there may be some special circumstances in which an LLP can access Research & Development tax incentives and grants. To find out if your LLP could qualify for R&D tax credits, it is recommended that you seek professional advice.
Is it possible to switch my R&D tax credit status between SME and RDEC?
Yes, a company’s R&D tax credit status can change as the business’s turnover, headcount and gross assets change. These are the factors that determine your categorisation between the large company research & development expenditure credit scheme (RDEC) and the SME R&D scheme. The latter tends to be more generous, and most companies prefer to be categorised within the SME R&D tax credits scheme where possible.
To qualify, you must have a staff turnover of 100 million Euros or less or gross assets of 86 million Euros or less. If you exceed these figures, you fall into the large company category for R&D taxation, even if you have fewer than 500 staff. If your company’s status changes, the qualifying criteria must be in place for two consecutive years in order to allow a switch in R&D taxation categories, unless an SME is bought out by a bigger company in an acquisition scenario. This is a complex area, and the team at F.Initiatives can provide advice and support on your specific situation.
If I switch between the RDEC and SME scheme, what are the effects on the benefits I receive?
The rate of the R&D tax credit is different between the RDEC scheme and the SME R&D tax credit scheme. If companies move to the former from the latter, its R&D tax credits will drop to 10 percent per £1 of spending under the RDEC scheme, compared to 33 percent per £1 of spending under the SME scheme. This is a simplification by way of example as other criteria must be taken into account in this highly specialised area.
How do I know that my project is eligible for R&D tax credit claims?
Here are some useful guidelines that can help you make a self-assessment:
1. Technical uncertainty – if the project had an evident or obvious outcome, it is unlikely to be classed as R&D.
2. Innovation – if the project delivered an outcome classed as common knowledge, then it would fail the innovation test for R&D
3. Cost – if you have only spent up to £3k on the project, it typically will not qualify for R&D tax credits, while a budget in excess of that amount typically will.
4. Qualifications – if you have been employing competent, highly-qualified and expert people to work on your project, then this could indicate eligibility for R&D. If the staff working on the project are not specialists or experienced practitioners in the field, then, it may not count as R&D for tax credit purposes. It is best to discuss this with a certified R&D tax expert who can assess your individual business case.
As a rule of thumb, if you have employed professional engineers, developers or other specialists to develop an innovative or new solution to an existing problem and spent over £100k on the project in the process, then it will be more certain that the criteria above are fulfilled.
How far back can I go when claiming for R&D tax relief?
The time limit for a research & development tax relief claim is two years – measured from the end of your business accounting period. This ties in with the deadline for amending any Corporation Tax on your return. If you are a business operating in your first year then you may have a different timeline, with your incorporation date creating the registration date, and your first period of accounting being defined as twelve months from the end of that nominated month. This needn’t apply going forward as you choose your accounting period. F.Initiatives can help you to assess how far back your particular business can claim for.
When will I receive the payment for the R&D tax credit?
The usual period is 28 days from the submission of your application to receive your R&D tax credit if you are an SME that is making a claim. For repayments of Corporation Tax, the timescales can be as short as one week. Due to the complexity of claims made by larger companies, the time frame for payment can be longer. Remember to allow a further 5-7 days for HMRC to make the payment and for it to appear in your bank account. An SME is wise therefore to allow at least 35 days from the date of an approved submission. Ideally, you should allow longer in case the process is held up, or in case it goes to enquiry.
What is a competent professional?
When HMRC talks about competent professionals, it refers to someone in the industry with the right qualifications, experience, skills and track record for the job in hand. For example, this might be a process engineer in a chemical manufacturing plant, or it might be a Chartered Accountant in a finance firm.
Within your business, this individual is the person who is best placed to make a judgement about the activities that count towards R&D. When a business prepares its own R&D tax credits claim, a competent professional must assess the projects which qualify for an R&D tax credit, the project boundaries and the applicable activities. They will then apportion expenditure to those identified activities. It is vital that accurate and detailed biographical information of your technical professional is included in the technical narrative that you submit with your R&D tax claim. This demonstrates to HMRC that you have applied due care and attention and applied the correct boundaries when assessing qualifying activity.
What should I include in my technical narrative that accompanies the R&D claim?
When submitting a research and development (R&D) claim for tax credits, you need to include a detailed technical narrative that will demonstrate in a clear and compelling way a) the technical nature of the project identified as being eligible for tax credits, b) the challenges faced in developing the innovation, c) the resources utilised and d) the achieved outcomes. Include details of how the R&D activities eligible under the R&D tax credits scheme were identified and assessed and describe the qualifying projects in detail. Begin with a background that explains your business within the context of R&D and isolate any commercial sensitives. Your F.Initiatives advisory team will be able to guide and assist you with your technical narrative and review it before it accompanies your R&D tax credits claim submission, which we prepare and submit on your behalf.
I want to use a new R&D tax credit advisor. How do I switch from my existing provider?
If you already use the services of a research and development tax credit advisor and wish to commission a new R&D advisor, check the details of your contract first to ensure that any contractual tie-in period has elapsed. If so, you can notify your existing R&D advisor and then initiate the switch. If you are locked in, then you will need to read the contract carefully to identify any possible opt-out clauses, ideally with the help of your solicitor. Always do your research in order to find a trusted, reputable and highly professional R&D tax claims advisory service with the necessary expertise and track record in submitting thorough, robust and effective R&D claims that make the process easy and get the right results for the client. A good indicator of a quality provider is one with plenty of good customer reviews and a multi-disciplinary team which includes tax advisors and consultants, accountants and former HMRC tax inspectors, along with a best practice process and keen commitment to quality assurance.
If I have made an earlier R&D tax credit claim, can I reuse it to save time?
No, you cannot. This is because HMRC expect to see due care and attention made when applying for R&D tax credits, and this means carefully assessing the unique detail and eligibility of qualifying R&D projects each and every time you prepare a claim. However, it is common for businesses to have R&D projects that last for several years, so that same project can be the subject of year-by-year claims for R&D tax credits.
You cannot recycle an annual claim form for ease, but you can use the basis of a previous R&D tax credit claim as a broad template or starting point for which you can start a new within-year claim. Remember that F.Initiatives can help you to make the R&D tax incentive claim process easy, with a robust and effective methodology that streamlines the process and ensures that your application is ready to meet the needs of HMRC.
What is the value of R&D tax credits to my business?
The precise figures that will be applicable to your business will depend on whether it is registered under the SME R&D tax calculation scheme or the RDEC scheme which is primarily for large companies, as well as other factors. As a broad rule of thumb, if you are a profit-making SME then you could potentially have up to 25 percent of your R&D investment costs refunded in the form of tax credits. A loss-making SME could expect to receive up to 33 percent back into the business and an SME in a break-even situation could potentially expect around 15 percent. For a larger company developing R&D under the RDEC scheme, up to 10 percent of research and development costs could be claimed back. This means that the value of R&D tax credits can be highly worthwhile, especially if you are running a business that invests heavily in innovation as standard, and spends heavily on engineers, developers and other specialists that seek to find new solutions to existing problems. Contact F.Initiatives and we can give you a clearer idea of the potential benefits that an R&D tax credits claim could offer to your business, as well as information about R&D grants that you may be eligible for.
How to Prepare for an R&D Tax Credits Claim
Know which scheme you qualify under
One of the first things you need to do when preparing for your R&D tax credit claim is to determine which scheme you qualify under. This is either going to be the RDEC scheme or the SME scheme. You will fit into the latter category if you have fewer than 500 staff and you have either 86 million EUR gross assets or 100 million EUR turnover. If your business is bigger than this, you will file your claim under the RDEC scheme. In terms of qualifying expenditure, both schemes are similar. However, the SME scheme tends to be more lucrative because the calculations differ. This is why it helps to have a professional at hand who can help you to navigate the scheme that is applicable to your business.
Figure out what qualifies and what doesn’t.
Once you know the scheme your business comes under, you then need to determine what qualifies for R&D tax relief and what doesn’t. After all, the last thing you want to do is unintentionally raise a red flag at HMRC, which could lead to an enquiry into your business. So, what does qualify? HMRC lists four qualifying categories. These are as follows: R&D consumables, subcontracted R&D, external staff, and direct labour. Just to make matters confusing, there are some exceptions to these categories, for example utilities, software licences, and payments to clinical trial volunteers. A lot of business owners make mistakes when it comes to filing their claim, and one of these errors is claiming directors as subcontractors. This is not allowed. Another error is claiming for the HMRC tax year, rather than your company’s financial period. Also, remember to file qualifying development as ‘intangible assets’, instead of ‘tangible assets.’ The latter is much more complex.
Don’t reuse a previous claim for R&D tax credit
A lot of business owners make the mistake of believing they can reuse a previous claim for research and development tax credit. This is not the case. HMRC want you to think about the eligibility of your qualifying research and development expenditure and activities every time you make a claim. Therefore, each claim needs to be unique. Nevertheless, while you cannot reuse a claim, a single project can certainly span numerous years, which means that a project may feature on more than one R&D tax relief claim.
Choose the right project
Once you’ve dealt with what qualifies and what scheme you fall under, you need to consider the actual work you have carried out. Ensure you choose the correct projects to claim for when submitting your technical narrative. In most cases, more than one project will be included in a claim.
Seek professional assistance
Seeking the help of a qualified professional is by far the simplest way to claim your R&D tax relief. Make sure to choose a consultant with competitive rates and a long track record of successful claims.
How F.Initiatives help you claim R&D tax credits
- Getting the details right
There are a few basics that need to be established before you can claim r&d tax credits. Our early conversations will determine whether you qualify and spot all the details we need to get you the maximum amount of relief from your research & development claims. This is to ensure you are registered as a UK limited company, the research and development you’re doing qualify for the government’s R&D tax relief scheme, and that you have invested in innovation. We do this by coming to your business premises and talking to your finance and technology teams about potential R&D tax credit claims.
- You tell us what’s important
During these visits we’ll ask for time with the people in your business with the skills and know-how to get you the most from your claim. We will ask for details of the R&D projects you have been working on, and how much that has cost your business. This gives us the knowledge we need to provide an activity report and an idea of how much your research & development grants could be for.
- We make it happen
The next step is to complete your R&D tax credit claim and send it to HMRC. We’re expert in this process of how to claim R&D tax credits and have already helped many other businesses. Through this process we’ve developed a thorough method for making these calculations which means your claim will be highly detailed and meticulously accurate. Once we’re happy we’ll send a detailed report to the taxman and amend to your Corporation Tax return (CT600) with our calculations.
- We deal with HMRC
Now, we wait. We’ll make sure the tax office has all the details they need from your research & development claim. And in the exact time frames they require it to claim R&D tax credits. We take pride in getting this right. We’ll follow-up on how your claim is going, and deal with any questions the authorities have about it. In some cases, HMRC will open an enquiry about tax credit claims. If that happens with yours then you can leave it in our hands at no additional cost.
- You receive your credit
Once the paperwork is done it usually takes HMRC up to six weeks to credit your bank account. In terms of your Corporation Tax, your benefit will depend on the current health of your business. If you are in profit then your tax bill will fall. If your business made a loss for the period, you get a cash credit.
– We provide a smart, experienced and fast service which offers peace of mind on all the little details of your R&D tax credit claims.
– We don’t charge unless we’re successful. Our fees are taken as a portion of the credit or repayment HMRC gives you.
– Our terms of service have no nasty surprises or hidden extras.
With large corporations
We’re very aware of the need for business-focused solutions for large firms and corporations. The research & development tax credits rates differ between small and large businesses so we’re ready and prepared to offer you the exact advice you need.
1.Meet and greet
Your first contact with us will be built around understanding your business, and where R&D tax relief might apply to your balance sheets. We’ll work closely with your finance team to look at the maximum amount you can claim, and to make sure your claim is appropriate and well-managed. A senior member of our team will visit you to facilitate this. From this conversation we’ll produce a practical and efficient proposal of work to meet your needs.
- Keeping you involved
We want to make sure you get what you need from us, but also recognise how valuable your team’s time is. We will ask you to organise a point of contact for us on any significant issues and make sure you know about any developments. In the meantime, one of our R&D tax services specialists will be working on your materials for HMRC.
3.What we provide
After the consultation period with your team we’ll produce a detailed document that leaves you in a strong position to claim from HMRC. This could include useful information for the workings of your business, including how to address HMRC enquiries or matters within your internal processes.
Armed with this information, you can make decisions about your next steps. If required, we’ll manage the claims process for you.
We will give you a clear fee for your project which is agreed before we start any work. There are no hidden charges as we look into the research & development grants available to you.
The fee may include a contingency element if it’s needed.
Working with accountants or advisors
We’re a solid business partner for other professionals and offer flexible and effective ways of working that match your reputation and expectations.
- Understanding opportunities
Talk to us about the possibilities for people that you’re already working with or aware of. We’ll organise a meeting that helps you identify people in your network that might qualify for tax credits. We can then follow this up with practical support to help you and your contacts. This may include training or attending events.
- Keeping in touch
We’ll connect you with a dedicated member of our staff are keep you up-to-date on the work we’re doing in your network. We value relationships in everything we do and want to work together for the benefit of all.
- Rewarding our partners
Good relationships reap great rewards. We work on a fee-sharing scheme to honestly recognise the value of the work we do with our partners in identifying companies suitable for R&D tax incentives. We think the reward is much more than financial though, it’s improving your own reputation and opportunities, as well as those in your network.
To find out more about how we can help you claim research & development relief, give our team a call today.