R&D Tax Credits

R&D tax credits

Last November, Prime Minister Theresa May promised an extra £2bn a year for scientific research with the specific intention of boosting Britain’s technology industries.

That’s all good news but the evidence seems to be that the message is not filtering down to Britain’s businesses. According to Rebecca Burn-Callander in the Daily Telegraph, “Did you know that 40pc of all the active companies in the UK generate some form of innovation, be it a new product, service, or business process? Yet most business owners have no idea that they qualify for money back from the Government in the form of an R&D tax credit.”

Here at Smart Team, a lot of our clients are cutting-edge businesses bringing new ideas and new ways of doing things to the market.

In this article, we look at R&D tax credits and whether your firm is eligible to benefit from the scheme.

 

R&D tax credits – what is classed as R&D?

With research and development, there’s an element of risk. You’re creating a new product, a new process, or a new service but you need to overcome technological or scientific “uncertainties” before you know whether it will work or not.

The same test applies if you’re changing something that works in an existing product, process, or service but you do not know how to make it functional in practice without research and development.

You can claim R&D tax credits even if the R&D you did was not successful.

R&D tax credits are available on your own projects as well as for work that is given to you by another company.

 

R&D tax credits – what costs can I claim for?

You can claim back:

  • employee costs for those engaged directly in R&D (directly employed staff with a contract of employment)
  • staff providers (where the staff member is engaged directly in R&D)
  • materials (consumable or transformable materials used in the R&D)
  • payments to clinical trial volunteers
  • electricity, gas, water, and fuel used directly in carrying out R&D
  • software used in R&D
  • subcontracted expenditure related to R&D (up to 65% of what you spend on these activities where a subcontractor is not connected to your company nor are you jointly responsible for a connected party’s treatment)
  • capital expenditure (under the R&D allowance scheme)

You can’t claim for:

  • consultants, staff, directors, or agencies workers whose employment contracts are with other companies who are not subcontractors and who are not supplied via a staff provider.
  • recruitment consultant fees
  • telecommunications and data costs

 

R&D tax credits – can my SME get these grants?

Companies with fewer than 500 staff and either less than €100m turnover or €86m in gross assets can qualify for SME relief.

The average R&D tax credit claim in the UK stands at £54,214, according to Taxation magazine.

 

R&D tax credits – how do the grants work?

You claim tax relief of up to 230% on your allowable R&D costs. So, for every £100,000 of qualifying costs, your company could be in line to reduce its corporation tax by an extra £130,000 on top of the £100,000 spent.

Here are three examples, one for a profit-making company…

Amount
R & D Expenditure £100,000
R & D Relief £100,000 x 130% = £130,000
Normal Taxable Profit £130,000
Taxable Profit Minus R&D Relief £130,000 – £130,000 = £0
Revised Taxable Profit £0

…one for a loss-making firm carrying that loss forward or backward…

Amount
R & D Expenditure £100,000
R & D Enhancement £100,000 x 130% = £130,000
Normal Taxable Loss £100,000
Trading Loss Less Enhanced by R&D Tax Relief £100,000 – £130,000 = £230,000
Loss Available to Carry Forward or Back for CT £230,000

…and one for a company wanting to receive a cash tax credit…

Amount
R & D Expenditure £100,000
R & D Enhancement £100,000 x 130% = £130,000
Normal Taxable Profit £50,000
Trading Loss After R&D Tax Relief £50,000 – £130,000 = -£80,000
R&D Expenditure Qualifying for Conversion to Credits £80,000
Potential Tax Credit £80,000 x 14.5% = £11,600
Payable Tax Credit £11,600
Losses to Carry Forward or Back Nil

R&D tax credits – what about HMRC?

To claim for R&D tax credits, you’ll have to provide details of the money you spent on innovation to HMRC.

The type of information they will normally look for is a description of your R&D projects, records of all the costs associated with it, and the methodology on the calculation you use to arrive at the level of tax credit you’re asking for.

Your claim is then entered in the R&D tax credit calculation on your CT600 corporation tax return document.

 

R&D tax credits – when do I receive the money?

If your business is making money, your overall corporation tax bill will be reduced. If you’ve already paid the tax, you will receive a repayment.

If you want to receive a cash payment because you made a loss in that financial year, the credit is paid directly into your business bank account within four to six weeks of HMRC receiving your CT600.

If you want to carry a loss forward or backward, you will receive no payment however this loss will be reflected on future or revised CT600 submissions.

 

R&D tax credits – how can Smart Team help?

R&D tax credits are complicated and your application for them will be scrutinised by HMRC.

Other than proving that what you do qualifies, the biggest thing to get right is that you have allocated all your expenditure correctly and can produce a clear and understandable financial trail.

Ask Smart Team for help on 01202 577500 or email [email protected]

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