How do you claim R&D Tax Credits?
R&D Tax Credits Claims Explained
It can often be confusing understanding how R&D tax credits are actually claimed by companies.
After all, there are a whole myriad of funding options out there including:
- Grants and subsidies e.g. Innovate UK
- Seed Enterprise Investment Scheme (SEIS) - tax efficient funding for equity in your company
- Enterprise Investment Scheme (EIS) - like SEIS but for companies that have been trading for > 2 years
- Bank / loan finance
- Invoice discounting / factoring
- Asset-backed finance
So where do R&D Tax Credits fit in and how are claims made?
R&D Tax Credits claims are filed with HM Revenue & Customs (HMRC) within your company's corporation tax return - called a Form CT600.
Your company is required to file a corporation tax after each financial accounting period in order to calculate and disclose to HMRC the amount of corporation tax payable or tax losses claimed.
The CT600 is normally accompanied by a Corporation Tax Computation which shows the details behind the calculations shown in the CT600. To most people, the CT600 is hard to follow as it simply plucks out relevant figures from the corporation tax computation to allow HMRC to extract and process the information they need.
The processing of tax returns is largely automated these days as tax returns, computations and accounts are coded into a form of computer language called iXBRL - but you don't need to worry about this (unless you are filing your return yourself!).
Where does the R&D Tax Credit claim go in the CT600 tax return?
The R&D tax credits claim figures for an SME that is claiming an R&D tax credit payment from HMRC will complete the following boxes within its CT600:
- Box 530 - Research and Development Credit - the amount of the R&D tax credit claimed
- Box 545 - Total of Research and Development credit, and creative tax credit - in most cases the same figure as in Box 530
- Box 570 - Surplus Research and Development credits or creative tax credit payable - in most cases the same figure as in Box 530
- Box 660 - R&D Enhanced expenditure - the enhanced R&D tax deduction i.e. the uplifted 230% figure
- Box 670 - R&D and creative enhanced expenditure - in most cases the same figure as in Box 660
Note that our comments are in italics above and that this relates to a new version of the CT600 for accounting periods starting on or after 1 April 2015
A couple more important Boxes not to miss out on the CT600 if you want to ensure a speedy processing of your R&D tax credits claim by HMRC:
- Put an 'X' in Box 40 to confirm that a repayment is due for the period - for your R&D tax credit payment
- Don't forget to include your bank details in page 10 to allow HMRC to process a bank transfer - much quicker than a cheque (especially when you take into account the fact that HMRC send mail second class!
Can I file my R&D Tax Credits claim early?
As noted above, your R&D tax claim is filed within your CT600 tax return. A return is necessary after each accounting period.
This can cause potentially severe cashflow problems for some companies - especially early stage companies.
Imagine the worst case scenario in which a company elects to have an 18 month accounting period and bumps up against its statutory deadlines at each stage:
- 18 months to the end of the period of account - before it can even start the process of recovering some of the R&D expenditure
- Up to 9 months to prepare the accounts
- A further 3 months to prepare and file the CT600 including the R&D tax credit claim
- 30 days for HMRC to process the claim
- 10 - 14 days to receive payment
That's nearly 2.5 years beginning to end!
Many entrepreneurs and founders are unaware of the potential time lapse between incurring the expenditure on qualifying R&D activities and getting a cash rebate from HMRC. Hopefully this highlights the potential issue...
A better plan for an early stage company might be to map out its cashflow and specific R&D milestones and consider 'shortening' (rather than lengthening as so many companies seem to do) its first accounting period to say 6 months.
With a bit of impetus and focus, a well planned startup might be in a position to recover some of its R&D expenditure within less than one year from incorporation.
How far back can I make a claim for R&D tax credits?
A company is required to file a corporation tax return within 12 months of its accounting period end. So a company with a 31 December 2015 period end is required to file its corporation tax return by 31 December 2016.
R&D Tax Credit claims have a two year time-limit in order to make a valid claim.
This means that it is possible to file a claim not only for its most recent period end (31 Dec 2015 in our example above) but also for accounting periods ended within the past two years. If the company had followed 31 Dec calendar year ends in previous periods, then it would be possible to file an amended return for the period ended 31 December 2014 before this time-limit expired on 31 December 2016.
It is possible to make a claim for two or even three periods if a company had changed its accounting period end in the past two years and therefore these period ends still fall within the last two years.
It is worth noting that an accounting period for corporation tax purposes cannot last longer than 12 months. So an 18 month period of account would actually be made up of one corporation tax return covering the first 12 months and a second accounting period lasting 6 months. This is an example of where a company may have more than two open periods within the past two years.
Finally, don't dismiss how far you can go back in time to recapture historical R&D activities and expenditure if the opportunity of claiming R&D tax credits had previously perhaps passed you by....
At the time of writing this article (21 Sept 2016) a company with a period ended 30 Sept would find that it has its periods ended 30 Sept 2015 and 30 Sept 2014 still open for retrospective R&D tax claims.
Taking the 30 Sept 2014 period, a company might have carried out some R&D work in the first three months of this period - that's way back in 1 Oct 2013 - 31 Dec 2013 and this is still open for a claim - for 9 days (and counting.....).