Business and society would not move forward if it weren’t for pioneering ideas and time spent on research and development. Of course, all of this costs money. Because of this, HMRC offers tax relief incentives to companies that undertake projects to make advancements in their fields – even if the project was unsuccessful. The relief scheme allows SMEs to deduct from their profits an extra 130% of the costs that qualify, in addition to the 100% deduction already in place, making the total deduction 230%. SMEs that made losses can claim tax credits up to 14.5% of the loss. Large companies can claim the Research and Development Expenditure Credit for up to 11% of qualifying expenses.
The first thing to consider is whether your company is considered an SME or a large enterprise under HMRC’s guidelines. If your company employs less than 500 staff and has either €100 million maximum turnover or an €86 million balance sheet at most, you are an SME for HMRC’s purposes.
Once you have established your company’s status with HMRC, you can then think about how your project qualifies for R&D tax credits. HMRC wants to know how you tried to make an advancement in a field within science or technology. This doesn’t include the social sciences or what HMRC defines as a “theoretical” field, such as mathematics. In addition to having sought to innovate within a field of science or tech, the project needs to have mastered uncertainty, or at least attempted to, and not been easily workable by any professional within the field. In other words, your project needs to have been done or shot for the exceptional.
How do you know if your project meets these standards? We at F.Initiatives offer our team of experts to advise you of where you stand and guide you through the assessment and application process. As the claim is facilitated through a self-assessment, we can help you make an honest critique of your work. The claim is made using the company tax return form CT600. We can help you fill the form out, as well as identify the parts of your project that should be highlighted as the most innovative and worthy of the deduction or credit.
At the most basic, you need to show that you looked for a particular advancement that would impact your entire field – not something that would just help your business. You also can’t claim a technology that already exists just because you’ve used it for the first time in your field. You’ll then need to work out the timeline of your research and development activity, beginning when you started your attempt to overcome the challenges and ending when you succeeded or admitted it wasn’t working and stopped. You then need to explain the unknowns that you and your project faced and how you blazed the path. This can include describing what did or didn’t work for your project or citing failed attempts from others who tried to answer the same questions. You can also have other people who worked on your project support your proposal.
In addition to a detailed explanation of your attempts at advancement and the obstacles you faced, you’ll need to provide a breakdown of your project’s expenses. These can include staffing, contracting and materials costs. You will need to ensure that these qualify. Salaries, some employee scheme contributions, and even some reimbursed business expenses are acceptable. Unnecessary costs such as employee bonuses and perks are not. This is another area in which F.Initiatives can help. We can look at your expenses in detail to work out what portion of your costs should be attributed to the claim. For example, only staffing costs that were directly attributable to the R&D work can be included, such as overseeing managers and employees. Support staff costs do not usually qualify.
HMRC cites the example of agriculture, stating that developing new feedstocks or growing new crops that increase production are advancements that would qualify for tax relief. Work on plant-breeding rights to a new crop would not. The first example is groundbreaking innovation, whereas the second is a project that could be carried out by any professional in the field. Another case study from HMRC includes the invention of an innovative computer code and an eco-petrol car engine aimed at parity with traditional engines. Both qualified for an R&D claim.
If you have a project that you would like to use to claim R&D tax credits but are unsure of where to start or what parts of your project qualify, please get in touch. We are pleased that the government rewards initiatives for advancements and encourages collaboration among industries for developing products and services. The scheme, introduced in 2000, has been a major catalyst for business innovation for nearly 20 years.