This blog is written to aid you in further understanding R&D tax credits, a system that can greatly benefit a company’s finances, and enable you to determine both whether you are eligible and whether you would like to take advantage of this innovation-rewarding scheme.
· The HMRC
What is R&D?
Research and development, or R&D, is a process used when designing a product or system within a company. The R&D tax credits scheme is a government scheme with the interest of innovation of science and technology in mind, making it more financially viable for small and large companies alike. The definition of R&D is purposefully broad, giving more diversity in the technology that can be created leveraging this scheme.
The system was created by the HMRC to incentivise innovation within the UK, supporting the companies with the aim for economic growth for the whole of the UK. Small businesses can benefit through the use of both the SME scheme and the RDEC scheme, with the SME scheme giving up to 33p back for every £1 spent on qualifying expenditure within R&D, with larger companies also being able to benefit from the RDEC scheme giving 11p back per £1 spend. For more information, see here.
In the year ending March 2020, estimates of over £7.4b were given for the total amount claimed back, with over 80,000 claims. An average return of over £86,000 was given to each business.
The HMRC is rather strict on what it defines as qualifying R&D expenditure for the R&D tax credit scheme, with many grey areas around what is and isn’t R&D expenditure, and what percentage of it is used within the R&D. Wages, for instance, are hard to define as the worker could be working on R&D and another project, so it is difficult to say what percentage of the workers time was spent doing work related to R&D. With this in mind, we recommend a specialist aid you in your application process.
Put simply, qualifying R&D relates to projects where you are either unsure whether a project is possible or unsure how it can be achieved in practice.
There are many costs that do not qualify for R&D tax credits. Learning the intricacies of what does and doesn’t qualify is important to making a valid claim, and anything claimed that doesn’t qualify can cause issues with the entire claim. While there are many things that can be claimed for, it is important to get a professional to help.
The following guide can show what your company could claim for and give a rough estimate of how much money could be returned with the R&D tax credits scheme.
Costs that are eligible:
Employee costs – Salaries, wages, class 1 NIC, and pension fund contributions can all be claimed for staff engaged in the R&D project. Salaried directors and a fair portion of indirect supporting staff can also qualify. Employee expenses sometimes qualify.
Subcontractors – You can claim for 65% of the cost for subcontracted R&D, or externally provided workers for an R&D project, provided it is an SME claim.
Software – Software used in R&D can be claimed for, and a fair proportion for software only used partly within the related R&D.
Consumable costs – The costs of materials and other related costs such as water, energy, and fuel bills. For example, when designing an engine fuel would be needed during testing. Heating and lighting can be eligible provided it is paid separate to rent.
Volunteers – If paying for volunteers, for example in a pharmaceutical company, to do trials, this can also be covered.
Prototypes – The costs associated with building and testing a prototype can be claimed for.
Costs that are not eligible:
Capital expenditure – A generous 100% of capital expenditure can be covered by the Research and Development Allowance for the plant, machinery and building, but as these are not strictly related to the R&D it is not covered by the R&D tax relief scheme.
Patent costs – The costs of creating a patent are not covered, however it is possible to claim up to a 9 percentage point deduction in corporation tax from 19% to 10% for a qualifying IP using the Patent Box scheme.
Rent or land costs – Rent and land are not counted as R&D and are thus not covered in the R&D tax relief scheme.
Production or distribution costs – Production occurs after the research and development stage and is not covered. Moreover, while prototypes can be covered, in the case where the prototype is a bespoke machine that is sold at the end, or the prototype is sold for any other reason, it no longer qualifies as R&D and is considered production.
How Much Money You Can Claim Back
Under the SME scheme, up to 24.7% of the R&D costs can be returned to a profiting company, increasing to 33.35% for loss-making companies. Larger companies, and in some cases SMEs, the RDEC scheme can return up to 11% of the R&D costs, with the average large company claiming £632,931 between 2018 and 2019.
The R&D credit reward is usually returned in the form of a tax relief for profit-making companies, and in the case of loss making companies it is in the form of a cash payment.
Must the Project be Successful?
Simply put, no, the project may fail. You can give up on a project and still claim R&D tax relief. Provided you sought a technical advancement and a competent professional found technological uncertainties, the project is still qualifying for R&D tax credits.
Failure in innovation is an important part of building technology, showing what is and isn’t possible at the given time. It also shows that the technological uncertainties were present. The aim of the scheme being to minimise a companies risk during innovation, relief can still be received even in the case of failure.
How Far Back Can I Claim?
With the R&D scheme, you can claim for the previous two accounting periods. The accounting period changes company to company but is usually annually from the date of incorporation. For example, if your accounting year ended June 2020, and it is currently January 2021, it is possible to claim for accounting periods ending June 2020 and 2019, given an annual accounting period. Come June 2021, you will no longer be able to claim for the period ending 2019.
The PAYE Cap on R&D Claims
As of the 1st of April, 2021, there is a new cap on R&D claims linked to the PAYE costs of the company. Claims will now be capped by £20,000 + 300% of the PAYE/NIC payments. As well as this, if over 15% of the R&D expenditure is subcontracted out to a related party it can disqualify your R&D claim. If you develop qualifying intellectual property, it can uncap the PAYE cap, however, it will not uncap the related party subcontractor cap.
How to Make a Claim
To make an R&D claim an R&D report must be written including all required technical information demonstrating to the HMRC that there was qualifying R&D. Additionally, HMRC may require you to break down the costs associated that make up the claim. This should be sent to support the claim made in your CT600 tax return form.
Making the claim can be arduous and difficult, and a wealth of knowledge of the HMRC is often necessary. Due to this, we recommend having a professional help with this. See what Inovasi can help you with here.
Inovasi helps companies to innovate with innovation incentives: R&D, Tax Credits, The Patent Box Scheme, and Funding. Inovasi aims to save you time, so you can focus on the core of your business, we offer expert advice, you can rest easy knowing your claim has been strictly adhered to HMRC legislation, reducing the chance of an inquiry, maximise all aspects of your innovation process, experienced, up to date on the latest guidance and changes related to R&D.
For this reason, we would suggest using an R&D specialist. At Inovasi, we take the time to understand you and your business, taking all the heavy work away from you, and we can ensure a robust and compliant report will be sent to HMRC to support your claim. In the unlikely event of a random inquiry, we will act on your behalf and show to HMRC how the project and costs associated are indeed qualifying. A technical advisor can help you figure out what is and isn’t R&D under the scheme.