Is your company involved in any Research & Development (R&D) activity? If so you may qualify for Research and Development Tax Credits – a tax relief available for UK companies.
What activities qualify as R&D?
HMRC defines R&D activity as work that is ‘part of a specific project to make an advance in science or technology’. You must be able to explain how the project:
- Looked for an advance in science or technology;
- Related to a trade the company undertakes or intended to undertake;
- Tried to overcome an uncertainty that couldn’t easily be worked out by a professional in the field.
A key point to note from above is showing there is uncertainty. The research or development must attempt to create an advance in the overall field of human understanding, not just in the context of your company. There must be some scientific or technological uncertainty that is not known to be feasible until the project resolves (or attempts to resolve) it.
Don’t make the mistake of thinking that a qualifying R&D activity involves people in lab coats and test tubes. Qualifying activities may include much more than you think, for example developing or refining manufacturing processes may qualify, as long as the project meets the criteria above. Even if the project is unsuccessful you may still be able to claim.
How does it work?
To make a succesful claim to relief, you'll need to be able to explain the work you did to overcome the uncertainty - a simple description of the successes and failures you had during the project may suffice.
There are different schemes available, depending on the size of your company and whether the project(s) in question have been subcontracted or funded with State Aid.
To be eligible for the SME scheme, your company must be an SME (defined as less than 500 staff and turnover of under €100m or balance sheet under €86m). The relief allows companies to claim an extra 130% of qualifying expenditure as a deduction from profits (every £1 of expenditure results in a £2.30 deduction against taxable profits). If your company is loss making, it can instead claim a tax credit, worth up to 14.5% of the ‘surrenderable loss’.
Qualifying expenditure includes staff costs, software, consumable items, and a proportion of subcontractor costs too.
If your project receives State Aid, or is subcontracted to you, it may not be eligible to claim under the SME scheme, but relief may still be available under the RDEC scheme. Relief under the RDEC scheme provides a tax credit of 11% of the qualifying expenditure.
Claims for R&D relief must normally be made within two years of the accounting period in which the costs were incurred.
If your company is involved in a project that may qualify for R&D relief, please get in touch and we will be happy to help.