R&D tax credits explained
The R&D tax relief scheme was introduced to the UK in 2000 to encourage innovation and global competitiveness. It enables UK companies to reclaim money invested in research or development, through the UK tax system.
Companies that spend money developing new or improve existing products, processes or services can claim a corporation tax deduction or receive a cash payment.
It is also available to companies that undertake scientific research.
- reclaim your research or development costs
- pre-revenue and loss-making companies can claim a cash payment
- companies can reduce their corporation tax bill
- companies can claim a refund of tax already paid
- can make a retrospective claim for two previous accounting periods
- the amount received is not repayable to HMRC
- no equity is surrendered
- improves your cash flow
HMRC has a broad definition of R&D for tax purposes. It includes projects trying to advance science or technology by overcoming technological or scientific uncertainties.
An R&D tax project could include any of the following:
create new products, processes or services
improve existing products, processes or services
through technological development improve business efficiencies by reducing costs, improving service levels or winning more business
develop technology, software or tools for own use
experiment with new equipment or production techniques
implement changes to adhere to regulatory changes
HMRC R&D requirements does not limit R&D tax relief to any sector. It is open to all industries. The development could be undertaken for your client or for your own use.
If you qualify or are unsure you qualify please get in touch with us and we shall give you a free review. This will be over the phone and should only last about 10 minutes.
- Staff costs to include salary, employer’s national insurance contributions and employer’s pension contributions. It excludes dividends.
- Materials and consumables including light, heat and power.
- Outsourced work or agency staff.
- Software used directly in the R&D, such as CAD system
The costs spent on research or development are claimed back through the UK tax system. Without an R&D tax claim, you would normally claim 100% of your costs to reduce your tax bill.
With an R&D tax claim, you can claim a further 130% of costs, in addition to the 100% you have already claimed so the total amount claimed would be 230% of your cost.
The increase in cost would result in less taxable profits so less tax would be paid.
A company spends £100,000 on developing a new product. It claims a deduction of £100,000 in its accounts and tax computation. The company approaches us for a free assessment of their development to find out whether they can claim R&D tax relief.
After a 10 minute phone call, we believe that they do qualify.
We claim a further £130,000 in the tax computation as R&D tax relief. This results in the company paying £26,000 less in corporation tax.
We can also make claims for tax bills already paid, resulting in refunds from HMRC. We can go back up to three years.
Alternatively, the additional cost may result in an increase in your losses. The loss generated by the R&D tax claim can then be surrendered at 14.5% for a cash payment. This means that the loss generated by the R&D tax claim is given up to HMRC and in return, HMRC gives you a payment of 14.5% of the amount given up.
- We undertake a free assessment, determining your eligibility, qualifying costs and qualifying periods. We agree to a fee and organise a face to face meeting with you at your premises.
- At our meeting, our specialist R&D tax consultant gathers all the information required to prepare your R&D tax claim.
- We prepare a technically sound report with supporting financial documentation, in a format accepted by HMRC.
- We liaise with you and your accountant, providing details of qualifying costs and any revised tax computations or company returns and submit the claim to HMRC’s specialist R&D tax relief department. We issue our invoice, but only expect this to be settled once your claim has been approved.
- You can relax while the claim is processed by HMRC, which usually takes four weeks.