R&D Tax Credits
Ultimate Guide

R&D Tax Credits is one of the single best sources of funding 

for companies of all sizes from startups to large companies

R&D Tax Credits at a glance

What are they?

  • UK Government tax incentive
  • Aims to fuel innovation in UK economy
  • Reward commercial & financial risk
  • Pushing the boundaries in your sector
  • Can be claimed year on year
  • One of the best sources of funding for SMEs

Who can benefit?

  • Administered by HMRC
  • Must be subject to corporation tax
  • UK Limited companies make up majority
  • Non sector specific
  • Doesn't matter whether profitable or loss-making
  • Cash tax benefits can apply in either case

What is it worth?

  • Loss-making SMEs can recover up to 33% of costs
  • Tax-paying SMEs can recover 25% of costs
  • Large companies can recover 10% of costs
  • Average claims are in excess of £50,000

How do I claim it?

  • Must carry out qualifying project(s)
  • Must have incurred qualifying expenditure
  • Projects within past two accounting periods only
  • Filed within CT600 company tax return

What are R&D Tax Credits?​

The Ultimate Guide to R&D Tax Credits

The R&D Tax Credit is a Government tax incentive that seeks to reward companies for taking commercial and financial risk in seeking to develop new or improved products or services.

This should in turn help increase innovation in the UK economy by helping stimulate growth, high value jobs and foster companies that have the potential to compete internationally.

It is not a one-off cash reward like a grant. Companies can benefit year on year if they continue to carry on qualifying projects. 

This is why it is such a valuable source of funding for so many companies – yet so many are still missing out… 

SMEs can reclaim up to of qualifying costs

Who can claim R&D Tax Credits?​

As long as an entity is subject to UK corporation tax it is within the scope of R&D tax credits

Companies in can benefit from R&D Tax Credits

The R&D tax credit is a Corporation tax relief administered by HM Revenue & Customs (HMRC)

So any entity that is subject to UK Corporation Tax could potentially benefit from this tax relief – in most cases, this will be UK Limited companies.

Further, the R&D Tax Credit is not sector specific. It can benefit any company in any sector. From Architects to…well…companies in a sector beginning with ‘Z’!?!

Neither does your tax profile matter for R&D tax credit purposes. It doesn’t matter if your company is profitable (paying corporation tax) or loss-making (not paying any tax): the R&D tax credit can provide valuable cash tax funding in either scenario.

If you are seeking an ‘advance in science or technology’ as part of a project (either internal or customer-facing) then you might have a qualifying project

This might typically involve a project that seeks to develop a new product or service or make an appreciable improvement on what’s already available in the marketplace.

A good sign is where you, as professionals in your field, have embarked on a project and you are uncertain whether you will be able to achieve the intended outcome from a technical perspective. Which means that there is inherent commercial and financial risk that you might fail.

Unfortunately, ‘eureka’ moments don’t qualify. You must be carrying out a systematic project that has a beginning and an end. Plus, typically, plenty of white-boarding, head-scratching and roadblocks along the way!

Seeking an in Science or Technology

Having to overcome

Which R&D Tax Relief?

There are two R&D tax reliefs in the UK tax code

1. SME R&D Tax relief

The SME R&D Tax Credit is the most generous and therefore preferable of the two reliefs. The size of your company (or group) is the key determinant of whether you fall into the SME R&D tax relief. Grants or subsidies can also have an impact

2. RDEC (Large Companies)

The Research and Development Expenditure Credit (RDEC) is aimed at Large companies. These are companies that do not fall within the definition of an SME for R&D tax purposes (or where grants or subsidies have an impact)

What is the definition of an SME?

R&D Tax Credits definition of an SME
Is my company an SME for R&D Tax Credit Purposes?

The Staff Head Count condition is mandatory. It is necessary to satisfy either the turnover or gross assets tests thereafter

Take into account group or investor interests. Grants can also impact on the SME qualifying status, regardless of these criteria

You must have less than 500 employees for the relevant accounting period.

This test must be satisfied to be classified as an SME for R&D tax credit purposes

Turnover must be less than €100m

Gross assets (balance sheet assets total) must be less than €86m

How does the R&D Tax Credits relief work?

Uplift on qualifying R&D costs

The SME R&D Tax Credit Relief works by applying a notional uplift to qualifying costs incurred on an R&D project. 

Currently the rate is a further 130% deduction applied to the (100%) deduction already received in the normal course of computing profits subject to tax: so a 230% uplift overall.

This 230% ‘super-deduction’ results in further costs to deduct against taxable profits, generating either a reduction in tax payable or the creation or increase in tax losses. A tax loss can be surrendered for an R&D tax credit payment from HMRC

 

SME R&D Tax Relief uplift is

What costs qualify for R&D Tax Credits?

Hint: You need to spend money to benefit from R&D tax relief

The R&D Tax Credit rules are specific on what costs qualify in calculating your claim

It is worth noting that the amount of expenditure that you have invested in a project provides a useful initial barometer of the likely qualifying nature of your project. If it is less than £10,000, then the chances that you are seeking an advance in knowledge or capability in your sector look slim

Gross salary, employer’s NIC, pension contributions and reimbursed travel & subsistence expenses

Subcontracted R&D work to a third party where they have given you a quote for a deliverable project.

Their work does not need to be innovative in of itself as long as it contributes to your qualifying project,

Special rules apply in the case of connected parties

Typically join your team and paid a day rate via a third party company i.e. not on your PAYE payroll

Materials that were used up within the development of your product or service e.g. for prototypes etc

This category also includes utility costs attributable to the R&D project(s) e.g. electricity, gas & water

Software licence costs attributable to the qualifying R&D work

Unfortunately, hosting costs (e.g. AWS) do not qualify

How far back can you claim R&D Tax Credits?​

You can claim retrospectively

You can claim R&D tax credits for qualifying projects that were carried out in your financial accounting periods that ended in the past two years. 

So you can effectively back-date claims two years to make retrospective R&D claims if you missed them.

This is great news as it may not be too late for you to recoup costs from recent past projects if you are new to the R&D tax credit relief!

Example: For a company with a 31 March accounting period end, in the run up to 31 March 2019 it can revisit projects that were carried out in its accounting period ended 31 March 2017. As long as it files the claim by 31 March 2019 i.e. for accounting periods ended in the past two years.

So in this example, a company could revisit projects as far back as April 2016 assuming the accounting period ended 31 March 2017 was a 12 month period 

HMRC Guidance on R&D Tax Credits

HMRC provides some useful guidance on qualifying projects in their ‘Simple Guide to R&D Tax Reliefs’

Grant funding and R&D Tax Credits​

Hint: They don't play nicely!

If you are considering applying for a grant, it is always a good idea to consider the implications for your R&D tax credit claim in advance. 

In a nutshell, you can’t claim the SME relief on grant-funded expenditure. If the grant is European Notified State Aid, this can impact the entire project. All is not lost, you can still claim under the RDEC, it is just not nearly as generous as the SME relief.

It can pay to crunch the numbers first. We can then provide you with a clear picture of what your cash position might look like down either route. Either way, we’ll help you optimise your relief between the SME and RDEC schemes

Grants can your R&D tax credit claim

How do I file a claim for R&D Tax Credits?

You might need your accountant's help (or ours!)

CT600 Tax Return: R&D tax credit claim

After you have calculated your allowable expenditure for R&D tax purposes, you need to include it in your CT600 company corporation tax return. HMRC’s Simple Guide to R&D Tax Credits contains useful guidance on exactly which boxes to fill in. You must file this return within 12 months of each accounting period end (in any case).

If the return has already been filed for the relevant period, you will need to file an amended CT600 return, this time including the R&D tax claim figures.

You must specify within the tax return whether you are claiming under the SME or RDEC tax reliefs. Also, whether you are seeking a tax credit payment from HMRC or carrying the enhanced tax losses forward.

R&D Tax Technical Report & Claim Calculations

A detailed technical narrative report that sets out how and why your project(s) qualify for R&D tax credits relief under the BIS Guidelines should also be prepared. Plus detailed calculations that quantify your claim for the relevant period. 

These documents should be filed along with your CT600 via the HMRC e-filing portal. It will be mandatory to file R&D tax claims via the HMRC portal from 1 April 2019.

Remember that you must file a claim within two years of the end of the relevant accounting period for it to be valid

CT600 to claim R&D tax credits

What happens after I have filed my claim for R&D Tax Credits?

HMRC will typically review and process claims within 4-6 weeks of submission.

Corporation tax refunds or tax credits will be sent directly to your bank account if you have included these details within your CT600 (you would be well advised to do so to speed up the process).

HMRC will not write to you to confirm that the R&D tax credits claim has been ‘agreed’, other than issuing you with a formal repayment notice and the cash deposit. The claim is presumed agreed at this stage, although HMRC has the right to open an enquiry within 12 months of the date of submission of the claim.

HMRC will typically review and process claims of submission

Do I need an R&D Tax Specialist Advisor?

£ 0
Average claim size (2016-17)

This is one of those ‘it depends’ answers.

If you have an accountant who seems well versed and proactive in helping you identify qualifying projects and the claim is around or less than the average then you may be okay to proceed with them.

On the other hand, if your accountant hasn’t ventured into exploring R&D tax credits with you, then you have to wonder why? Maybe they are uncomfortable or unsure how to prepare robust R&D tax credit claims. This might be a good reason to reach out to experienced professionals in this area like ourselves.

You shouldn’t need to ‘leave’ your current accountant to work with an R&D tax specialist, in fact, this should be a good opportunity for us to add to the good work that your accountant or bookkeeper is already doing for you.

Contact

Like to discuss your project?

Tel: 01248 305002 / 0161 9160096
[email protected]

Frequently Asked Questions

Most frequently asked questions and answers for R&D tax credits

Yes it can apply to companies like yours. It doesn’t matter that your company has not as yet paid any PAYE because you don’t have any employees nor corporation tax as you’re pre-revenue.

You could be in line for an R&D tax credit payment from HMRC!

Watch out for a change in rules kicking in from April 2020 that will take into account PAYE to claim R&D tax credits 

No, you can still claim R&D tax credit relief. 

The critical point is where your conpany is resident for tax purposes. If it is UK tax resident subject to UK corporation tax then you are in the scope to make a claim for R&D tax relief

You absolutely can claim R&D tax credits if you have tax losses. This is exactly the situation in which R&D tax credits apply.

It is not a refund of corporation tax already paid in the case of R&D tax credits – it is a credit reward to keep on investing in the pioneering work that you are doing

Yes, the R&D tax relief can benefit companies like yours too.

Rather than claim the SME R&D tax credit, you will benefit from the 230% uplift in qualifying costs that will reduce your profits subject to tax. This in turn means that you will pay less corporation tax (and/or reclaim overpayments for the past two accounting periods) 

No, dividends are not qualifying costs for the purposes of R&D tax credits.

If your contribution to the R&D tax project(s) is expected to be significant going forward, you may wish to crunch the numbers to determine whether it might make sense for you to get paid via PAYE salary

R&D Tax Credits Updates

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R&D Tax Credits

Key points from HMRC Introduction to R&D Tax Credits Webinar

We dialed-in to an online webinar presentation on “R&D Tax Credits” held by HMRC last week. It was an introductory webinar so we didn’t expect to learn much! But we wanted to see if we could pick up any latest insights for our clients. Key takeaways from the webinar were as follows: How long does

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Changes to R&D Tax Credit Claim Filing Process

HM Revenue & Customs (HMRC) has been notably flexible over the past 18 years in how it has accepted claims for R&D tax credits. This contrasts with the strict rules for the filing of a company’s CT600 tax return. It has been a formal requirement for a while that CT600s must be digitally filed via

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5 R&D Tax Credit Tips for UK Software Development Companies

Here are five R&D tax credit savings tips primarily aimed at software development companies in the UK. You may already be claiming R&D tax relief, or you may be looking at your first claim, either way here’s just a few tips that may help you get the most out of your claims. Overseas Developers The

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Contact us to discuss your claim

Phone: 01248 305002 / 0161 9610096
Adress: M-SParc, Menai Science Park, Gaerwen LL60 6AG