R&D Tax Credits Explained – What are they? Do I Qualify?
R&D Tax Credits Explained by Hamilton Wood & Company
Research and development (R&D) tax credits are a valuable UK government tax incentive that rewards limited companies who are investing in qualifying innovative projects.
R&D Tax Credits are worth up to £33,350.00 back for every £100,000k of qualifying expenditure.
Limited companies spending money to develop new, or enhance any existing processes, products, systems, materials, devices and/or services are eligible to make a claim.
Companies can claim for failed or shelved projects as well as successful ones.
This form of valuable tax relief can be used as an alternative to traditional business funding options and can be reinvested in future business projects.
They can be used in replacement of or in conjunction with innovation grants and business funding.
So How Do R&D Tax Credits Work?
Certain areas of business activity qualify for R&D Tax relief when a project is structured in a certain way and trying to advance science and/or industry.
If eligible, a business can claim back retrospectively up to two open tax years, and if a loss is carried it is possible to go back slightly further. The UK government are strict on only allowing a business to claim two years back. If your companies financial year end is approaching and you’ve not yet made a claim, contact us now so you don’t lose your entitlement because once it’s gone it’s gone.
This valuable form of tax relief is based on the amount of expenditure you invest on projects that qualify as R&D activity. The incentive exists because the UK government wants to encourage businesses to continue our long and proud history of being a world-leader recognised internationally for delivering world-changing innovations and inventions.
R&D Tax Credits are by far the most attractive form of tax incentive available to UK businesses.
Really, why is that?
Well, for every £1 of qualifying expenditure, the government will give you an additional 130% tax relief on top.
This enhanced pot of tax deductible spend has the effect of substantially reducing your corporation tax bill and if once applied it creates a loss, then you will also be eligible for a tax rebate typically within a six to eight week period from the point your claim is submitted.
Surely Our Business Isn’t Eligible for an R&D Claim, Is It?
What Expenditure Counts As R&D?
Thankfully the governments’ guidelines are broad. Let’s not forget that the reason the incentive exists is to drive innovation. The government and treasury wins when your business does.
Regardless of your company size and or sector, if you are using any technologies at all, or working to resolve any uncertainties not immediately obvious to a competent individual then you are more than likely carrying out qualifying R&D activities.
Enhancing or refining existing products, services, processes (even if the project failed)
Designing and creating new products, services or processes (even if the project failed)
You might have an idea and not know if it will work. If your business is taking steps to try and make your idea a reality and you are encountering unforeseen challenges or barriers to success that have to be overcome you will qualify for R&D.
Again, the government don’t expect all projects to succeed but they admire your trying.
What R&D Costs Can I Claim For?
We are very methodical when we review any R&D tax claim.
We seek to identify any qualifying areas of activity that can include:
Expenditure on free-lancers and sub-contractors
Expenditure on software providing it’s been used either directly or indirectly on a qualifying project.
Expenditure on consumables including gas, electric and lighting, all the way through to raw materials and anything else within reason that falls under the qualifying project.
Claim up to 100% of people’s wages, NI Contributions, Pensions contributions and any bonuses. (Then add another 130% accelerated relief)
We Can Help Your Company Claim Back Any Money It’s Owed.
We help companies from all over the United Kingdom recover millions of pounds every month.
We are trusted partners to members of the Institute of Chartered Accountants in England and Wales (ICAEW) and the ACCA.
Our in-house team of advisors will save you time and money by helping to prepare a detailed report for the government that presents your qualifying activities in the best light possible.
Our team act as agents on your behalf and we have an extremely good track record of negotiating qualifying projects and settlements with the government.
Start-up companies are often at the cutting edge of their industry. They have often spotted a gap in the market that they want to exploit, and they utilise new and untested ways of doing things. If this is the case, and you are operating at a loss, you can get more than a third back of every pound you spend! Hoorah!
An average claim made by a Small to Medium Enterprise (SME) is around £50,000.00
R&D Tax Credit claims are a quick and efficient way to give your business a cash injection. Contact us now for more info.
How Much Can I Claim Back?
X20% Corporation Tax = £13,000.00£13,000.00 / £50,000.00 = 26%
£50,000.00 +£65,000.00 Enhanced Relief = £115,000.00
£115,000.00 x 14.5% Surrender the Loss Rate = £16,675.00 CASH REBATE£16,675.00 / £50,000.00 = 33.35%
X20% Corporation Tax = £65,000.00£65,000.00 / £250,000.00 = 26%
£250,000.00 +£325,000.00 Enhanced Relief = £575,000.00
£575,000.00 x 14.5% Surrender the Loss Rate = £83,375.00 CASH REBATE
X20% Corporation Tax = £130,000.00£130,000.00 / £500,000.00 = 26%
£500,000.00 +£650,000.00 Enhanced Relief = £1,150,000.00
£115,000.00 x 14.5% Surrender the Loss Rate = £166,750.00 CASH REBATE£166,750.00 / £500,000.00 = 33.35%
X20% Corporation Tax = £260,000.00£260,000.00 / £1,000,000.00 = 26%
£1,00,000.00 +£1,300,000.00 Enhanced Relief = £2,300,000.00
£2,300,000.00 x 14.5% Surrender the Loss Rate = £333,350.00 CASH REBATE£333,500.00 / £1,000,000.00 = 33.35%
What Criteria Affect R&D Tax Claims?
Certain criteria can impact the overall tax benefit from an R&D claim.
The following list of areas don’t necessarily mean that you can’t claim however, the overall value of the claim after these points could be slightly less.
Having said that, a claim would still be substantial but just not as generous as the areas highlighted above.
Does Using Subcontractors Affect My Claim?
If you have contracted in sub-contractors to help you with a particular project and you are benefiting from external skills (i.e. not P.A.Y.E. employees) then you can recover up to 65% of your total expenditure.
If your company has been contracted in to provide R&D services to a controlling entity, then it is likely your entitlement will be processed under the governments RDEC scheme.
Establishing your true entitlement is a grey area and thankfully our specialists can quickly identify your full correct legal entitlement. Call now for a free no obligation health check.
If My Business Has Benefited From Subsidies And/Or Grants Will This Affect My Claim?
Companies who have benefited from grants and/or subsidies normally have to apply for this form of tax relief through the governments RDEC initiative.
More often than not, the overall R&D benefit is at a rate of 11% when there is a grant involved.
There are nuances depending on your circumstance and for that reason we recommend you talk to one of our experts now.
Wait, I Have a Business Overseas…
You may still be able to claim if your business is based overseas. Providing you’re a UK tax payer and the company has undertaken qualifying activities then you may still be able to make a claim but again, this is a grey area and we recommend talking to one of our in-house experts.
We Are Part of a Group Structured Company, Are We Still an SME?
On paper, there are legal definitions and requirements to determine if your company is indeed ‘attached’ to another company.
Many things are considered including number of employees, assets, turnover amongst others.
When all things are considered and your true position is clarified it could be that you are aligned to the governments RDEC R&D scheme specially created to benefit larger companies.
Our specialist advisors are happy to help and once we have methodically assessed your position and the strength of your claim then we can present the claim to the government on your behalf.
Establishing exactly what rules apply given your current and historic position can be a confusing and daunting process. Let our specialists take the pain out of the process and help you get your money back quickly and efficiently.
Sounds Fantastic but I’ve Not Paid and PAYE Earnings or NI Contributions…
Many years ago this would have been a problem. The great news is that long ago on 2012 the government abolished this old hat way of thinking and now lets you claim against other qualifying areas within the embedded business costs.