What are R&D Tax Credits?
Qualifying work for R&D tax relief has to be for a project providing specific advances within science or technology, and must relate to a company’s existing trading operations or to proposed startup trading operations.
Qualifying projects can include the research or development of new products, services or processes, or research and development into existing products, services or processes. R&D tax grants are provided by way of tax relief on corporation tax that’s due or via tax credits, if the business is loss making.
Qualifying costs that can be claimed for R&D projects include:
1. A proportion of the salaries for staff working on the project which includes Class 1 NICs and pension contributions. You can also claim for administrative support if it relates directly to the R&D project. A total of 65% of rates payable to external staffing agencies used to support the project are also claimable.
2. If you use a sub-contractor to provide work for the R&D project, 65% of total costs are allowable expenditure.
3. Materials and utility costs are allowable expenses which can be entered into R&D tax credit claims.
You won’t be able to claim for the costs of land, capital expenditure, the production or distribution of goods or services, costs of patents or trademarks, or payments for rent or business rates.
Claims for R&D relief can be made up to two years following the end of accounting periods relating to the research and development costs and should be made using the enhanced declaration section of form CT600, Company Tax Return. It’s always advisable to provide an accurate summary of your research and development project to aid the decision-making process.
R&D tax relief and tax credits for SMEs
SME R&D tax relief or tax credits allow SMEs to claim a tax credit of up to 14.5% of the total surrenderable loss for loss making businesses or to make an added 130% deduction of qualifying costs from the annual profits, giving a total available deduction of 230%.
Any SME qualifies for the R&D tax relief or tax credits if they employ less than 500 staff and have a turnover less than €100 million, or balance sheet figures less than €86 million. However, information on external investors, linked companies and partnerships will need to be included within any standard SME definition.
In order to claim SME R&D tax relief you’ll need to show ways in which your project fulfils the R&D definition provided by the UK Government. Companies making their first R&D tax relief claim may qualify for the Advance Assurance aspect, which provides automatic acceptance of R&D claims for three accounting periods, just so long as they are in line with the original agreement.
Research and Development Expenditure Credit (RDEC) for large companies
R&D tax credits are available to larger companies under the Research and Development Expenditure Credit (RDEC) scheme. It’s also possible for SMEs to claim this credit if they have been contracted to work on R&D projects by large companies. The RDEC scheme provides corporation tax credits of 11% of qualifying R&D expenditure and can either be used to discharge corporation tax liability or it will be a cash payment for large companies operating in loss making situations.
The qualifying staff costs for the RDEC scheme are the same as those applied under the tax relief for the SME scheme. However, relief for sub-contractor costs does vary as these can only be allowed if they are provided by a charity, a higher education institute, a health service body, a scientific organisation, or an individual or partnership of individuals.
Claiming RDEC tax relief can be accomplished by completing the enhanced expenditure section of the Company Tax Return Form (CT600) and the expenditure credit should be applied in the following way. The first step is to use the credit to settle the outstanding Corporation Tax liability for the accounting period. If this means that a repayment of Corporation Tax that’s already been paid is due then interest will be calculated using a last in, first out methodology. If there is still RDEC remaining following the completion of step one above, then this is reduced by the addition of a notional tax charge and any remaining credit should be used to pay off outstanding Corporation Tax due from any previous accounting periods or other accounting liabilities, such as VAT.
Claiming R&D tax credits can be a time-consuming procedure, involving a good deal of reporting to ensure compliance with regulations. F.Initiatives provide R&D information and advice to businesses looking to fund innovation via grants and incentives and can help with your application for R&D tax credits. Contact us for more details.