Research and Development Tax Credits can be a vital asset to small businesses. If you’re working on developing a new product, a service, or a process related to science or technology, then R&D Tax Credits relief could help your project to advance.
However, many businesses fail to make the most of the Research & Development Tax Credits that are out there. While the number of businesses taking advantage of the scheme has risen over the years, there are still many businesses that could be benefiting. More than 34,000 businesses claimed R&D tax relief for the tax year 2016-17, which was double the previous year.
So why are so many businesses missing out? Some of the reasons might include a business not understanding that their work is eligible, or even that the scheme exists. Others might be put off by the claims process and not understand that it can be simple, especially as the costs associated with making a claim can be recovered.
To find out if you qualify for R&D Tax Credits, it’s important to understand the types of schemes available, as well as who is eligible and what it means for your business. Below you’ll find all of the relevant information for businesses seeking R&D Tax Credits.
How does the R&D tax credit work?
R&D Tax Credits exist as a way to encourage businesses to carry out research and innovation projects that can make a difference. The scheme was launched by the Government back in 2000 and is used by many small business enterprises (SMEs) to offset their research and development costs. This helps ensure that businesses continue to innovate and grow.
If you run a small or medium-sized business R&D tax relief allows companies can allow you to deduct some of your costs from your profits and costs. A small business could claim up to 33% of its research and development costs, including those for unsuccessful projects. Meanwhile, larger businesses could claim up to 10% of their costs back.
When you make an R&D tax credit claim, it will be paid as a corporation tax refund, and therefore can be offset against future costs, or invested into areas such as further research, equipment costs and hiring additional employees. It can also be paid as negative corporate tax, meaning you’ll pay less when it’s next due.
What is research and development?
Research and development relate to the investment in innovation by UK businesses. According to the Government, a project has to meet certain criteria to be classed as R&D. More specifically, they must be projects that contribute to the advancement of science or technology. It does not relate to projects that are related to theoretical areas or social sciences.
For your project to be classed as R&D, the work must be related to your business or industry. Your business doesn’t yet have to be established, it could be set up based on the results of your project.
An advancement in the field should be the aim of your project, which not only relates to the creation of new products, services or processes but could be an improvement on existing work. Your work needs to demonstrate that it couldn’t have been developed by professionals in your field, including highlighting previous failed attempts.
Uncertainty is an important factor in Research and Development. Uncertainty relates to when something is seen as being ‘technically impossible’ by those in the field, despite all existing research and advances. Finding a way of overcoming this uncertainty is what forms your research and development.
You can find more detailed information on what qualifies as R&D via the Department for Business, Innovation and Skills. You can also talk to R&D claims experts like Together Accounting who can give you further insight into whether or not you’re eligible to make a claim.
What is included in research and development costs?
In the case of Research and Development, to get money, you need to spend money. If your company has spent money developing advances that meet the criteria mentioned above, then it could be possible to recover most of your costs through R&D Tax Credits. This includes spending on things such as:
- Staffing costs (both employees and contractors)
- Materials and items purchased as part of your project (provided they were not resold afterwards)
- Consumable items, including utilities, used as part of the project.
- Licences for software and applications used as part of the project
- Prototype costs
- If you’re working collaboratively with another company, you might still qualify for the costs incurred directly by your business.
- Any associated professional fees, including R&D claims professionals who have assisted in making your claim.
Some of the things that can’t be claimed for include:
- The production and distribution of goods and services
- Capital expenditure
- Land costs
- Costs associated with patents and trademarks
- Rent or rates
You are eligible to claim for your first R&D costs over the previous two financial years – a period which could stretch up to 36 months.
Who is eligible for R&D Tax Credits?
There are many types of businesses that are eligible for Research and Development Tax Credits. Fundamentally, they need to be 1) a limited company, and 2) businesses that have found a solution to a problem – either for themselves or on behalf of a customer or client.
To be classed as an SME, your business should:
- Have a total employee headcount of fewer than 500 people.
- Either a turnover of less than €100m or a balance sheet total of less than €86m. You will need to convert your sterling turnover figures into euros.
Over the years, we have helped a range of businesses to claim R&D Tax Credits, including:
- A security installation company
- A software company designing a product for a client
- An online retailer who developed their own bespoke website
- A manufacturing company that set up an automated line
- A company that set up a bespoke marketing database
- Other business where they identified an issue and had to solve the problem themselves
Do R&D tax credits count as State Aid?
R&D Tax Credits are considered to be a very valuable asset for businesses. It is a grant rather than a tax rebate, which means it is considered to be State Aid. It’s important to be aware that if your business was to receive any other form of notifiable State Aid, you would not be entitled to R&D Tax Credits. This is outlined by the European Commission, although there could be changes to the rules depending on the outcome of Brexit.
You could still be eligible for other grants as part of your project, but it’s important to check whether or not the grant is considered to be State Aid before you accept.
How far back can you claim R&D tax credits?
In your first application, you can claim R&D tax credits as far back as the previous two financial years from the end of your accounting period. Subsequent applications will need to cover the previous financial year. If your accounting period differs from the typical financial year (April – April), you will still be able to claim according to your individual accounting period.
Are R&D expenses tax deductible?
You might incur costs as a result of making your R&D Tax Credits claim. If you use a professional to make your claim on your behalf, for example, you will be able to claim this cost back. For many small businesses without tax or accounting expertise, this can be a simple way to make sure your claim is handled correctly and hassle-free.
There are many benefits to using an external agent to handle your claim on your behalf, including accuracy and ensuring that all of your costs are included in your claim. There could be costs that are easily forgotten about, or you might not realise were eligible. With the cost of someone preparing the claim on your behalf deductible, it can be a sensible easy solution for your business.
What does tax credit mean?
A tax credit is a grant that is paid in lieu of the corporate tax paid. It can be used to reduce a corporate tax bill, or it can be given as payable cash credits. For many businesses, especially SMEs, tax credits can be very useful to help you manage costs and establish your business. It’s also a fantastic incentive for businesses without the resources to invest in R&D to begin innovative projects that could have a significant impact.
Can you claim R&D Tax Credits on capital expenditure?
The question around Research and Development Tax Credits and capital expenditure can be a tricky one, but it’s an important one for businesses to think about.
A company developing a new application or software, for example, might want to sell on their research and development to other businesses, which would make their project ineligible for a tax credit.
However, if capital expenditure was used in the project to get the desired outcome, then that could qualify for an R&D tax credit. Generally speaking, R&D tax credits are based on revenue expenditure, which involves expenses associated with the day to day running of your business (staff costs, etc.).
If you have resold your capital expenditure, you will not be eligible to claim.
Where are R&D expenses on an income statement?
In reference to the profits and loss element of the accounts, payments will be made in one of two ways:
- A payment to the company (if it is more than the tax owed) – it will enter the accounts as other income.
- If the claim is more than the tax owed, it will be offset against the tax
Meanwhile, the R&D expenses featured on an income statement will include expenses that are directly spent on your research and development. Many businesses choose to allocate a portion of their budgets each year to R&D in a bid to develop new products, services and find better ways of doing things. If you look at big companies like Apple or Amazon, you’ll see that they allocate a significant portion of their profits to further R&D. With R&D tax credits, the Government makes it possible for small businesses to do the same and ensures some valuable innovation happens in the UK.
Making a claim for R&D Tax Credits
In order to make a claim for R&D tax credits, you’ll need to put a proposal together to help you submit the required Company Tax Return Form (CT600). You will need to work out all of your costs associated with your research and development and make a claim. You’ll need to put a strong case together to explain why your project qualifies for the tax credits.
In most cases, a claim will be approved within 2-8 weeks. It can take longer if the HMRC needs to ask questions about your claim or needs you to submit further information. Entering the correct information is vital, as mistakes could lead to a delayed payment, or even cost you your claim.
This is where bringing in expert help can benefit you the most. By having someone else work through your claim, you can be sure that you’re putting the best case forward and leaving no stone unturned. Professionals with expertise in making R&D tax credit claims will know the information to include and will be able to advise you on any areas that are unclear. For new businesses, in particular, having someone prepare your claim on your behalf can be extremely valuable.
You can find more valuable R&D resources on the Government’s website. This can help you to learn more about the type of expenses you can claim for, as well as answer specific questions you might have about your claim. Alternative you can contact us and we’d be happy to answer any questions you may have.