The UK Research and Development (R&D) Tax Credit relief is a Government tax incentive introduced in 2000 to help incentivise British companies to invest in developing new or improved products or services.
It is extremely broad in its application and can apply to companies across all different sectors (unfortunately the name "R&D" tax relief often results in companies (mistakenly) thinking it doesn't apply to them).
The key message is not to be put off by the title "research and development" and instead to focus on the technical project work that your company might have undertaken over the past couple of years and to what extent it sought to achieve an advance in your sector?
To give you an idea, here are just some of the sectors that we have helped companies access and maximise their claims for R&D tax credits:
- Software development
- Digital marketing
- Design and Manufacturing
- Food & drink (incl agri-tech, packaging etc)
- Aerial incl Drones
Hopefully this list starts to give you an idea of the breadth of application of the R&D tax credits incentive...
The good news is that more and more companies are starting to wake-up to the potentially significant year-on-year tax cashflow savings that the R&D tax relief can bring - the bad news is that there is much further to go...
What is an SME for R&D tax purposes?
- Headcount of less than 500 staff AND either
- Balance Sheet assets of less than €86m OR
- Turnover of less than €100m
These high thresholds for R&D tax credits purposes means that the majority of UK companies will fall under the more generous SME R&D tax scheme (except for where there are grants - see further below).
A Large Company for R&D tax purposes is a company that exceeds the SME thresholds. You also need to take into account parent and subsidiary companies and other interests in your company.
How do you claim R&D Tax Credits?
R&D Tax Credits Relief is claimed via your company's annual corporation tax return.
A claim either reduces corporation tax payable for profitable companies or can result in a cash tax credit payment from HM Revenue & Customs for companies that are loss-making.
So in either a profitable or loss-making scenario, the R&D tax relief can deliver positive cashflow savings.
What R&D expenditure is eligible for R&D Tax Credits?
- Staff Costs
- Externally Provided Workers
'Staff costs' comprises gross salary, employer's NIC and company pension contributions.
For each of the above categories of qualifying expenditure, it is necessary to consider what apportionment of the total cost can be applied to the R&D project work.
We can help you navigate these requirements.
Will my Company's activities qualify for R&D Tax Credits?
The first important point to note about the UK R&D Tax Credits incentive is its breadth of scope. It can apply to any company in any sector so long as your company is seeking to develop a new product or service or improve on what's already out there in the marketplace.
There are three key pointers to help you identify qualifying activities for R&D tax purposes:
- You are seeking to develop a new product or service that would result in an technological advancement on what's already out there in your sector (i.e. there is a shortfall in the current state of knowledge or capabilities that you will have to attempt to bridge)
- You and / or your team are competent professionals in your field but you're not entirely sure how you are going to achieve your objective from a technical perspective i.e. commonly accepted practices or methodologies in your field will not work or be sufficient - therefore, there is inherent 'technical uncertainty'
- You have incurred financial and commercial risk by deploying staff on this technical project; perhaps outsourcing aspects of the work to subcontractors to help solve it and / or investing in parts and materials (plus energy costs) used up in the project.
We find that some companies are reluctant or lack confidence in the qualifying nature of the work they have undertaken and, therefore, often dismiss their eligibility for R&D Tax Credits - given the amount that is at stake for companies, this could be a costly mistake!
Fortunately, a discussion with experienced R&D tax specialists like us (who have successfully filed and negotiated R&D Tax Credits submissions with HMRC for many years) typically helps identify projects that qualify for R&D tax credits relief.
What other factors could impact on my claim for R&D Tax Credits?
Here are a few factors that could impact on your claim for R&D Tax Credits (not exhaustive):
- Being a member of a corporate group
- VC investment
- Subcontractor relationships
The above factors do not necessarily preclude you from claiming R&D tax credits - they may, however, impact on which R&D tax scheme you are eligible for in a particular accounting period.
How far back can I make a claim for R&D tax credits?
You can make a retrospective claim for R&D tax credits for R&D project work undertaken in your financial accounting periods that ended in the past two years.
So you may be able to go back and recover expenditure that you incurred in previous accounting periods!
Can I make claims for R&D Tax Credits in future periods (or is it a one-off claim)?
Yes, absolutely - R&D tax credits are there to support you year-on-year throughout your development journey
You could be recovering £50,000+ each year from now on....as long as the investment into qualifying R&D project work continues...
Is it worth bothering claiming R&D Tax Credits?
Put simply there aren’t many Government-backed tax incentives that will actually put money in your bank account to support the technically challenging and valuable work that you are undertaking – let alone often within just 30 days of filing!
Average successful claims are £50,000+ and we have successfully secured several six figure cash tax saving claims within 5-6 weeks of engagement to commence the work.
- the equity you might need to give up to secure these levels of external investment?
- stress of guarantees from the bank to receive this level of loan funding? or
- products / services you would need to sell to secure this level of ‘profit’ direct to your bottom line?
Our clients have been absolutely thrilled with the results that we have secured for them and have used the R&D tax credits savings to invest in more staff, bigger premises and more technically advanced projects to keep them ahead of their competition.
What could you use your R&D tax credits cash tax savings for?