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What is the Research and Development Tax Credit? And can you claim?

The Research and Development Tax credit is a generous government scheme aimed at encouraging UK companies to take part in innovation and reward them for doing so.

Companies that invest and spend on developing new processes, services or products in whatever sector may be eligible to claim the Research and Development tax credit, no matter what it is they are working on.  The same applies if they are enhancing or improving existing ones.

The reward can be in the up to the equivalent of 33p for every £1 spent on R&D which can mean a cash refund in the pre-turnover stage or a reduction in your corporation tax bill once trading.

Your qualifying expenditure is identified and then enhanced to work out what you will get.

What qualifies as research and development?

When you hear the term Research and Development (R&D) you probably think of men and women in white lab coats, carrying clip boards and looking at test tubes.  But that does not have to be the case at all.

For the purposes of the Research and Development tax credit, you need to be attempting to ‘resolve scientific or technological uncertainties’ and taking a risk in doing so – i.e. incurring the costs and the chance it won’t succeed. You will be either looking at creating a new solution or developing an existing one. The project doesn’t even have to succeed to qualify – if you can say that it’s not possible, that saves other people time trying.

So it could be a new mobile app or a new production process you are working on, or may be developing an existing one.  As long as it’s deemed to be enough of a step forward you may qualify.  Simply making an iPhone pink would not be considered a jump forward, but if you developed an app for it that diagnosed diabetes by being carried in your pocket then it would be.

What expenditure can I claim?

The costs of employees like salaries, NI and pension, subcontractor costs (restricted to 65%), any materials or consumables like light and heat, and maybe software costs, can all potentially be claimed.

Each cost can be looked at and argued on its own merits as to what costs are directly attributable to the project.  In the 2015-16 tax year the average claim for SMEs was £61,514 so it can certainly have an impact on cash flows.

When can I claim?

You make the claim as part of your Corporation Tax submission after the company year end, but it can also be done retrospectively after you have already filed, up to two years.

The Two Schemes

Most companies that meet the criteria will be claiming under the more generous SME scheme if they:

  • have less than 500 staff
  • turnover less than £100m
  • or a balance sheet under £86m.

If you don’t meet these criteria, or you do but have already received state funding for the project, then you will not be able to claim under the SME scheme.

You may however still be able to claim the less generous Research and Development Expenditure Credit.  The credit is 11% of your qualifying expenditure and is a taxable income. Depending on whether you are profit or loss-making dictates whether this will used to pay your tax liability or result in a cash payment.

If you think you could have a potential claim then contact us on the details above.  The process can be long winded and complicated, which is why it’s essential you have someone who knows what HMRC is looking for to assist with your claim and get as much back as possible.