Wouldn’t it be great if it was easy to help businesses take more risks?
…..Or to help with their funding?
…..Or improve their cash flow?
In most cases this is difficult to do.
The good news is that companies may be eligible for funding using research and development tax relief.
On today’s show, I’ll give you an overview of R&D tax relief.
Welcome to the first episode of The R&D tax show. The show that helps accountants and tax advisers on their clients’ claims for R&D tax relief.
We shall cover the basics of research and development tax relief, including the benefits of R&D tax relief, why it was introduced, how to qualify and how to claim.
Overview of R&D
A simple overview of R&D tax is that it is funding through the corporation tax system for developing new or improving products, processors, software or machinery.
It was established as the UK Government realised that compared to GDP (Gross Domestic Product), the amount invested within productivity was decreasing, especially compared to other countries around the world.
To sustain competitiveness, the UK Government introduced R&D tax in the year 2000.
Since then, the relief available has substantially increased, hence why more companies are claiming R&D tax relief now than ever before.
Benefits of R&D tax relief
Now you know what R&D tax relief is, what are the actual benefits of claiming research and development tax credits?
Well, this all comes down to cash flow. So when you spend money on a new product or improving an existing product you receive a proportion of that cash back.
This does one of two things, the first being that it can reduce your corporation tax liability so you are paying less tax resulting in saving more money or it can result in a payable tax credit in cash (for loss making companies), which increases money in your account.
Qualify for R&D tax relief
How do you know if you qualify for R&D tax relief?
There are three conditions that need to be met.
The business must be a going concern and must be within the corporation tax system. Essentially, these will be PLC’s and Ltd’s however, other organisations subject to corporation tax can qualify, including CICS.
The second qualifying condition is the project itself. Does the project centre around difficulties surrounding science and technology. If so, then typically it can qualify.
The third is costs associated with the company in undertaking R&D.
So what costs can you claim back?
Qualifying costs include staff costs, outsourcing, materials, utilities, software used within the development and also trials for experimental procedures.
Time Limits of a R&D Tax Claim
So what are the time limits of making a R&D tax claim?
This is fairly straightforward, the claim must be within two years from the end of an accounting period. As an example, for the year end 31 of March 2018, a R&D claim must be submitted to HMRC by 31st of March 2020.
R&D Tax Schemes
There are two different schemes available within R&D tax relief.
- The SME scheme is more generous in how much the company can recoup as a percentage of costs. This is generally around 25%.
- The RDEC is around 10% which is a significant difference.
An SME has less than 500 employees and either of:
- Turnover – €100mn
- Gross assets – €86mn
Any organisation not meeting this condition will be treated under the RDEC scheme.
Claimants of R&D tax relief
Who are the typical claimants for R&D tax relief?
Typical company sectors that claim are software developers, manufacturers and engineering firms.
These companies could be making products/services for themselves or they could make them for their clients.
We work with many clients ranging from banking firms designing an open banking app to engineering firms that make anti-flooding systems for towns and cities.
How do you claim for research and development tax relief?
The R&D tax claim consists of a detailed financial report and a supporting technical report.
We work with your client and identify the qualifying costs and incorporate these into the tax computation and CT600.
We have a technical meeting with your client and this helps us gather the information to prepare the technical report.
This report package is then sent to HMRC’s R&D tax department so they can process the information. The claim is usually processed within 8 weeks and any refunds or tax credits are paid to the client.