The Research & Development (R&D) tax relief system exists to encourage businesses to invest in innovation. Often misunderstood, and under-claimed by small companies, it can offer substantial benefits to qualifying firms.
What amount of tax relief can you claim for?
If your firm qualifies for R&D tax relief, you can offset the cost of research and development against your Corporation Tax bill, or alternatively receive tax credits.
The Small or Medium-sized Enterprise Scheme, which will be most relevant to Company Bug readers, is open to firms with 500 or fewer employees, and an annual turnover of 100m Euros or less.
If your company qualifies, you can claim 225% tax relief against the costs of your R&D expenditure. Prior to 1st April 2012, the relief was 200%.
A further change announced at Budget 2011 made the regime even more attractive to small firms was the removal of the requirement to have spent £10,000 on qualifying R&D during the relevant corporate accounting year.
Is your company eligible to claim R&D Tax Relief?
The rules governing eligibility may seem a little hard to fathom on first inspection.
HMRC’s definition of an eligible project is one that “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”
However, this doesn’t mean that you have to invest millions into innovation via a science lab; a qualifying project could involve adapting or creating new tools or creating technological innovations – when the outcome and success of the project was not known at the start.
Many small firms are unaware of the qualification rules, but the financial benefits to those who can qualify are substantial.
What type of costs can you claim for?
If both the project and the company qualify, you can claim for costs of the day-to-day running of the business. The main areas are:
- Employee costs – the costs of hiring staff who work directly on the qualifying project.
- Materials – the physical materials used in the qualifying project.
- Software – any computer software used for the project.
- ‘Staff Providers’ – the cost of supplying agency staff to work on the project.
- Utilities – the cost of electricity, water, fuel, etc. (but not data or telecoms costs).
- Subcontracted costs – you can claim 65% of any costs carried out by a subcontractor on behalf of the project.
The main HMRC guidance provides further details on each of these areas to help determine whether costs qualify for tax relief.
Claiming R&D Relief
Your accountant is most likely to submit your company’s claim on its behalf. The claim itself is made via the company’s annual Corporation Tax Return. If your company wants to convert some of the Relief into a cash tax credit, this should also be noted on the Company Tax Return.
Your Corporation Tax bill will be reduced, or you will receive a cash tax credit from HMRC, depending on the circumstances of your claim.
Companies will normally have two years from the end of the relevant Corporation Tax period to claim R&D Tax Relief.
The complete guide to R&D Tax Relief – HMRC
In-depth information on R&D tax credits – Department of BIS