We are living in uncertain times and it has never been truer that cash is king and research and development (R&D) incentives can be an invaluable way to boost funds.
Many companies are still surprised to learn they qualify for R&D tax relief, which can prove to be a valuable source of funding. If you have developed new or improved products or processes, you may be carrying out a qualifying activity.
The key test is to establish if your company has been conducting a project that seeks to achieve an advance in science or technology. The advance refers to overall knowledge or capability in a field of science or technology. It does not simply mean an increase in the company’s own capability. But it can include the adaptation of existing knowledge where this adaptation was not readily deductible.
How much is an R&D claim worth?
How much a claim is worth depends on how much money you have spent on qualifying R&D activity. Eligible costs can include appropriate expenditure from the following:
- staff costs, including employers NIC and pensions
- subcontractors* (restricted to 65%)
- software and consumable items
*A restriction is anticipated for accounting periods beginning on or after 1st April 2023. There will generally be no R&D relief for payments to subcontractors unless their work is undertaken in the UK.
For small and medium-sized businesses (also known as SMEs), the headline rate is 230%. The company gets 100% relief for the qualifying expenditure through its accounts, so the enhancement is another 130% on top. For profitable companies that pay corporation tax, this enhancement generates relief at 19%. Therefore, a company with eligible expenditure of £20,000 will see a total reduction in its tax liability of £8,740 (£20,000 x 230% x 19%).
But a company with a trading loss can also claim and generate a repayable tax credit calculated at 14.5%. For example, a company has a current year trading loss of £50,000 and qualifying R&D expenditure of £20,000. The surrenderable loss is the lower of £50,000, and £20,000 x 230% = £46,000. Therefore, the repayable tax credit is £46,000 x 14.5% = £6,670.
This is ‘free money’ from the Government.
PAYE cap on payable tax credits
It is important to note that a restriction was introduced for accounting periods beginning on or after 1st April 2021. The maximum payment that can be claimed is £20,000 plus 300% of a company’s PAYE and NIC liabilities for the period; there are some specific exemptions.
What is the deadline for making an R&D claim?
Companies have two years from the end of an accounting period to submit R&D tax claims for qualifying expenditure incurred in that period. This means claims for the year to 31st May 2018 are still in time, but the clock is ticking.
If you have already made a claim for this period but want to be sure you haven’t missed out on any untapped value, the same deadline applies for reviewing and amending an existing claim.
How do R&D claims work?
R&D is a Government tax incentive designed to encourage and retain innovation in the UK. The Government rewards limited companies that are innovating because it knows that doing so brings significant benefits to the wider UK economy. Please note R&D claims can only be made by limited companies.
You must be undertaking research and development and have spent money on it. Recent claims by TaxAssist’s specialist R&D team vary from a company involved in space exploration collecting soil samples from Mars to a small cottage industry that developed a paste form of soap that can be more easily posted out to online customers.
A great number of the claims involve some kind of software development and these days it seems it can be done by companies of all sizes – one company has two young people pretty much operating from their bedrooms, while another more sophisticated company is dealing with international banks. From this, you will see the breadth of potential claims. Innovation can come from any field.
Don’t let your grant funding stop you
There is a misconception that the receipt of a government grant prevents companies from claiming for R&D. This is not true. How much your R&D tax claim is worth will depend on the nature of the grant. That determines if a claim can be made under the SME regime, under the large company scheme (known as RDEC) or as a mixture of both. The interaction between grants and R&D tax claims can be complicated, but with expert advice you can ensure your funding position is optimised.
How to make an R&D claim
It is best to work with experts in this specialist area when submitting a claim to ensure the value of your claim is maximised. This means including everything that is valid, while also ensuring it can be robustly backed up should HMRC challenge it.
Date published 29 Apr 2020 | Last updated 25 May 2022This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.