Research and Development tax relief/credits for SMEs is a legislated corporation tax relief that rewards SME companies in the UK for investing in innovation. Ian Batkin, Partner at Luvo Financial, explains how the relief works, what qualifies and how to make a claim.
What is R&D tax relief?
Research and Development (R&D) tax relief, also known as R&D tax credits, is a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.
Introduced in April 2000, R&D tax relief is a valuable government tax incentive for limited companies of all sizes that invest time and money into developing new products, processes and services, or enhancing existing ones, and represent a valuable source of cash to support businesses to continue or accelerate their R&D activity.
R&D tax credits can be claimed by:
• large companies via the RDEC scheme
• small and medium-sized enterprises (SMEs) via the more-generous SME R&D relief scheme
Typically, R&D tax relief claims average at around £50,000, with about 95 per cent of claims usually settled by HMRC within 28 days of submission. Despite this average amount and the speed at which payments are made, it is surprising to learn that current estimates indicate that no more than 10 per cent of SMEs that might be eligible to claim actually do so.
Many businesses do not realise they are eligible for R&D tax credits due to low awareness of the schemes, as well as several common misconceptions about the scheme. However, eligible R&D is more than just science-based research and development, and is in fact open to every business, regardless of sector.
Manufacturing, engineering, IT and the service sector, for example, that have sought to overcome issues in trying to develop new or improved products, processes, services or systems, are likely to qualify to claim. Furthermore, businesses do not have to employ R&D staff (PhD’s or otherwise) and they do not have to own the IPR from what they’ve done, in order to be eligible to claim.
What is SME R&D tax relief and who can claim it?
To be eligible to claim under the SME R&D tax scheme, a business needs to:
- be undertaking eligible qualifying R&D
have less than 500 staff
have either a turnover under €100 million, or a balance sheet total under €86 million.
SME R&D tax relief allows companies to:
- deduct an extra 130% of their qualifying costs (essentially P&L costs consumed in undertaking the R&D) from their yearly taxable profit, as well as the normal 100% deduction, to make an attractive total 230% deduction.
claim a tax credit if the company is loss making, worth up to 14.5% of the ‘surrenderable loss’. Though, it’s worth also noting here that there will be a cap introduced in respect of payable cash credits for all accounting periods commencing after 1 April 2021, but this will only potentially affect larger SME repayment claims.
It’s worth noting that linked companies and partnerships also need to be considered when determining if you’re an SME. If you’ve already claimed and received grant funding (state aid) in respect of R&D, you will also almost certainly be forced to claim under the RDEC scheme, even if you would otherwise be classified as a SME.
To qualify for R&D relief you need to have stood the cost and financial risk from undertaking the research and/or development of a new product, process, system or service, or improve on an existing one. In addition, you’ll be required to explain how a project:
- looked for an advance in science and/or technology
had to overcome uncertainty and how you went about this
could not be easily worked out by a professional in the field.
What costs can you claim for under R&D Tax?
There are seven categories of eligible revenue costs that can be assessed and included as part of an R&D tax credit claim, where they meet the requirements of HM Revenue and Customs (HMRC). Additionally, though less frequently, Capitalised Intangibles can potentially be included for eligible projects where appropriate accounting treatment has been given.
Claiming SME R&D relief for periods that include and span the COVID-19 pandemic lockdown periods will need to take some additional and specific matters into account. Notably, this will mean excluding furlough payments, but nevertheless should still provide claimants with a potentially life-saving cash injection during these very difficult and unprecedented times.
As R&D tax credits is ‘activity based’ and not based upon success. That means you can even claim for failed projects or for where the technology only initially benefits yourselves. It’s about the journey, not the destination, and failed projects often demonstrate difficulty and that R&D has taken place.
Qualifying R&D projects are not restricted to being market-facing either. If the work undertaken is focused internally, for example ‘bespoking’ or integrating software, and no readily available third-party offerings meet your unique needs, then this could well qualify for R&D tax relief.
How do you claim SME R&D tax relief?
Claims under SME R&D tax relief are made within the claimant’s Tax Comp/CT600 Tax Return. This must include a breakdown of costs claimed and an explanation of the work undertaken, appended accordingly.
Some believe that claiming R&D tax credits is risky, that HMRC don’t want claims to succeed, and that claiming may lead to broader tax investigations. However, none of this is true. Claiming is not at all a risk if you properly understand the legislation, only claim for what you are legitimately able to claim for and present the claim in the correct way.
The easiest and most likely successful way of claiming for R&D tax credits is to use an adviser with in-depth, specialist, first-hand knowledge and experience of the UK R&D tax scheme. They will know the do’s and don’ts, and the exact information HMRC wants clearly provided to speed-up processing a claim and the financial rewards.