How can I claim research and development (R&D) tax relief?
Many companies may be missing out on claiming tax relief for research and development (R&D) activity. In my blog I set out below the answers to some of the most frequently asked questions about this potentially valuable tax relief.
What is R&D tax relief and why does it benefit a company?
R&D tax relief is an enhanced tax relief which can enable companies to claim relief at up to twice the value on costs associated with research and development activities. For example, your company may be employing an engineer at forty thousand pounds per year who is developing a new product. Under this system your company may be able to claim tax relief on eighty thousand pounds.
What does R&D mean for tax purposes?
The technical answer is you have to demonstrate an appreciable improvement in either science or technology which has been achieved through a systematic approach. e.g. with each new season F1 teams spend vast sums of money to improve the performance and speed of their cars. They aren’t totally redesigning their cars just moving them on – evolution not revolution. In so doing, year on year, they are able to make significant claims under the relief scheme.
What type of costs can qualify?
In the main it is staff costs of the people involved in the R&D, however it can be anything consumed in the R&D process up to the point of manufacture/commerciality. Typically this will include utilities, software used, R&D sub-contracted expenses and staff employed through agencies.
There are many cases where someone within a company is working on something new but the financial team, who are often based upstairs or in an office away from the production, are blissfully unaware of this and don’t take the necessary course of action – thereby missing out on claims or rebate opportunities.
Can an individual qualify?
If you mean the guy in his garden shed inventing the next best thing since sliced bread, then no! However the guy in his shed could incorporate himself within a company then the company would qualify.
I’ve heard that there are different types of R&D tax schemes, what are they?
SMEs can claim the enhanced relief at 200% on qualifying revenue expenditure. If they are profitable, they can offset the claim against taxable profits. If they are loss making, they can seek a rebate under what is known as the R&D tax credit scheme. The rebate works by effectively selling R&D tax losses back to the Revenue for a rebate of PAYE and NIC that the company has paid. At a rate of approximately 14%, this would mean on £100K of “enhanced” losses sold back, you would receive £14k cash back.
Is there a minimum amount we have to spend and is there a maximum we can get back?
Presently companies have to spend at least £10K per year on qualifying costs. However, this limit is being removed next April. If a company wants to surrender R&D related losses for a cash rebate, at present the upper limit on rebates is the amount of PAYE and NIC paid by the company in the financial year. This limit is also likely to be removed in the next year because the Government feels that it is preventing start-up companies from claiming.
How much is this scheme worth?
The existing value of the scheme to the UK is approximately £1billion per annum – of which only 1% currently finds its way to the North East. Considering the industrial- and manufacturing-based economy we have, both Tait Walker’s advisers and the HMRC feel that is a worryingly low figure! In addition, as a region the North East develops the 3rdhighest amounts of patented technologies “per person” in the UK, therefore the statistics suggest local companies are missing out by not claiming and could be sitting on a vital windfall.
I think this applies to my company can I only apply for this current year?
Typically companies should be able to apply for at least the current year and each of the last two financial years.
How can I claim the rebate?
Claims should be included in corporate tax returns which will mean that the claim is submitted at the same time as the company has filed tax returns with HMRC. HMRC aims to settle all valid claims within 28 days. My advice to anyone wishing to make a claim would be to seek help from a professional advisor.
How will HMRC react if, having been in business for a while, I start to make claims of this nature?
Positively! HMRC is aware that a lot of companies still aren’t fully aware of the R&D tax relief scheme and the opportunity to make a claim – and it would appear by the low level of claims being made from this region that this is the case.
HMRC is very helpful and wants to encourage companies to look at any R&D work they are currently doing or planning on doing and make a claim. If your claim is successful, the windfall you receive may make a difference to both your company and employees.