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Understanding R&D Tax Claims and Expenditure

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The R&D Tax Credit scheme was first introduced by the government in 2000 to recognise and encourage innovation in business. Since then it’s developed to become a vital lifeline for many companies in the UK, offering either a reduction in corporation tax or a cash payment.

Limited companies in any industry may be eligible to claim research and development tax relief for innovative science and technology projects they undertake, so are you eligible for R&D tax relief and how do you make a claim?

How do I make an R&D Tax Claim?

There are two research and development schemes in operation in the UK:

  • The Research and Development Expenditure Credit Scheme (RDEC)
  • The SME Scheme

RDEC

If you’re a larger company you can claim through the Research and Development Expenditure Credit Scheme, and receive a deduction in corporation tax for the amount of qualifying expenditure you claim.

If you have no corporation tax to pay you could receive a cash payment, or alternatively, a tax credit in relation to other taxes/duties owed by your company.  Some smaller companies that subcontract their research and development activities, or that receive grants, subsidies, or state aid, can also claim through RDEC.

The tax relief rate on this scheme is 13% of qualifying R&D expenditure (from 1st April 2020).

SME Scheme

SMEs are identified as companies with fewer than 500 members of staff, and either an annual turnover of less than €100 million or a balance sheet total of less than €86 million. You can deduct 130% of qualifying R&D costs from your annual profits, in addition to the usual 100% deduction.

If you’ve made a loss you can claim a tax credit equivalent to up to 14.5% of your surrenderable loss. It’s also possible to backdate a claim for R&D tax relief two accounting years.

Claiming back R&D is complicated, but you can get free independent advice from an R&D specialist in our Advisory team at Real Business Rescue. We’ll provide expert guidance on making your application to maximise the amount you receive, and help you write a comprehensive R&D tax claims report that details your project(s) and where costs were incurred.

What are the benefits/advantages?

Making claims for R&D offers many advantages to eligible businesses - R&D tax claims benefits include:

  • The RDEC and SME Schemes are open to businesses in all industries
    You don’t have to run a business in the field of science or technology to benefit from making an R&D claim. If you’re a UK company and are registered for corporation tax, innovative science or technology-based projects you undertake may meet the eligibility requirements and you could claim back your qualifying expenditures through one of the schemes described above.
  • Claiming R&D tax relief reduces your current and future tax liabilities
    You can significantly reduce your current and future tax liabilities by claiming back research and development expenditure.
  • There’s no minimum claim amount for R&D
    There’s no longer a minimum claim amount for R&D - you can claim your research and development expenditure even when costs have been low.
  • Loss making companies can apply
    Even if your business isn’t profitable, you can still claim a tax credit equivalent to up to 14.5% of your surrenderable loss.
  • You may be eligible to make an R&D tax claim even if your project failed
    Your project doesn’t need to have a successful outcome to claim research and development costs. Even if it fails, the fact that you’ve tried to resolve an uncertainty in the science or technology field, and have tried to innovate, means you may be eligible.

Another significant benefit of R&D tax claims is the wide range of research and development expenditure that can be claimed back. So what qualifies as R&D expenditure?

What is R&D qualifying expenditure?

You can claim for a broad range of research and development costs. R&D qualifying expenditure includes:

  • Direct staff costs – wages, salaries, overtime pay, employer NICs and pension contributions, for example
  • Computer software – if it’s been used partly for R&D activities you’ll need to apportion it accordingly
  • Consumables including heat, light, power, water, and fuel
  • Some subcontracted R&D expenses
  • Externally Provided Workers (EPWs)
  • Volunteers in clinical trials (mainly in the pharmaceutical industry)
  • Project materials

Knowing which expenses to include in an R&D claim, and apportioning certain costs correctly, can be difficult – if you include expenditure that doesn’t qualify, HMRC may investigate.

For more information and professional guidance on R&D tax claims and expenditure, please contact our R&D specialists in the Advisory team at Real Business Rescue. We offer free same-day consultations, and operate an extensive network of offices around the country.

Keith Tully

Partner

0800 644 6080
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