Introduced in April 2000, the government’s R&D Tax Relief scheme means businesses can recover around 25 percent of what they’ve spent on eligible R&D, delivering an average pay-out of between £45,000 and £55,000 per claim for SME’s.
Despite the financial sums involved, around 90 percent of eligible businesses haven’t yet made a claim. In a bid to raise awareness of the scheme and challenge some of the misconceptions surrounding R&D Tax Relief schemes, partner and co-founder at Luvo Vicki White, gives a step by step guide to R&D Tax Relief.
R&D Tax Credits are a valuable government tax incentive for limited companies who invest time and money into developing new products, processes, systems and services, or enhancing existing ones.
Companies who invest in R&D activity are eligible for a cash payment, a reduction in corporation tax payable, or increased losses to carry-forward.
R&D reliefs support companies that work on innovative projects and can be claimed by a range of companies that seek to research or develop an advance in their field, whether product or service based. It can even be claimed on unsuccessful projects.
Types of R&D Tax Relief
There are two schemes available to claim the relief: SME (Small-Medium Enterprise) scheme, and the Large Company (Research and Development Expenditure Credit, RDEC) scheme.
You may be able to claim Corporation Tax relief if your project meets our definition of R&D.
There are different types of R&D relief depending on the size of a company and whether the project has been subcontracted to you or not.
Small and medium sized enterprises (SME) R&D Relief
You can claim SME R&D relief if you’re a SME with:
• less than 500 staff;
• a turnover of under €100m or a balance sheet total under €86m.
SME R&D relief allows companies to:
• deduct an extra 130% of their qualifying costs from their taxable profit, as well as the normal 100% deduction, to make a total 230% tax deduction;
• claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Research and Development Expenditure Credit (RDEC)
This replaces the relief previously available under the large company scheme. Large companies can claim an RDEC for working on R&D projects.
It can also be claimed by SMEs and large companies who’ve been subcontracted to do R&D work by a large company.
The RDEC is a tax credit for 11% of your qualifying R&D expenditure up to 31 December 2017 and 12% from 1 January 2018.
What counts as R&D?
The work that qualifies for R&D Tax relief must be part of a specific project that seeks to make an advance in some aspect of science or technology. It cannot be an advance within a social science like economics or a theoretical field like pure maths.
The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D – so you may research or develop a new process, product or service or improve on an existing one.
To get R&D Tax relief, you need to explain how a project:
• looked for an advance in science and technology;
• had to overcome uncertainty;
• could not be easily worked out by a professional working in the field.
What counts as R&D to qualify for a claim?
Certainly, much of the work carried out by science, life science and pharmaceutical based organisations would automatically qualify for R&D Tax, but there’s a host of other less lab-based activities that UK businesses are carrying out each day that, whilst perhaps less obvious, will certainly represent a legitimate claim.
If you are a manufacturer, whether in the engineering sector, or food and drink, or other sector, and have an ongoing strategy to constantly improve, refine and develop your products through research and experimentation, then this activity / cost would qualify for R&D Tax Credits.
Creating new processes / ways of doing things:
If you are a business developing new software or manufacturing systems for your operation, then this will qualify for R&D Tax Credits. As this would be deemed to be a step that creates improvements to how you to do things, and in turn, improve your product or service offering, this is very much activity that is eligible to be claimed for.
Enhancing existing systems:
Operationally, all businesses will have an eye on how to improve day-to-day efficiencies, capacity and overall performance. Enhancements to how your staff produce or deliver products or how services are undertaken, are likely to qualify for R&D Tax Credits.
Not all products or services that are ‘off the shelf’ will exactly match what your customers and clients are looking for. If in response to a customer needing a modification or material adjustment to your standard product or service line, this could also mean you will qualify for R&D Tax Credits.
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