Research & Development Tax Credits
Research and Development is one of the UK Governments key drivers for productivity growth. High levels of R&D supports strong and stable growth.
To qualify, R & D must be part of a project or planned objective, it must seek to increase the overall stock of knowledge or capability in a particular field, it must seek to resolve scientific or system uncertainty.
R & D includes gaining knowledge that already exists elsewhere, but which is a “trade secret” and therefore unavailable to your business, in essence to gain it, you must re-invent it.
Small or medium-sized enterprise (SME) R&D tax relief allows companies to:
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
If your company is involved in any of the following activities, you may be eligible for R&D Tax Credits
- Manufacture Products
- Develop new, improved or more reliable products and process
- Develop Prototypes of Models
- Experiment with new materials
- Design of custom machinery, tooling, dies and moulds
- Apply for patents
- Develop custom software or implement new systems
- Building new manufacturing facilities
- Automate internal processes
- Employ outside consultants and sub-contractors
The list is by no means exhaustive as eligibility can be found in all industries regardless of whether the company is engaged in typical activities.
Many companies are unaware of the significant tax saving incentive that is available. The R&D tax credit is often overlooked by organisations that do not normally associate R&D to their business or industry.
Many clients used to regard their day-to-day business as “just doing my job”, when in fact they have been continually performing R&D qualifying activities.
No company should be discounted on the grounds of industry eg. A service based company with a large payroll may still qualify for a significant refund.
All limited companies have access to this scheme, large and small, profitable or lossmaking.
What counts as R&D?
The main part of an application for R&D tax credits is knowing what you can and can’t claim for.
In most instances you can claim R&D relief on revenue expenditure, i.e. day-to-day operational costs, but not capital expenditure (money spent on fixed assets such as land and buildings), or the cost of using or creating a trademark and the production and distribution of goods and services within claim.
Below we have outlined some key areas which you can include in your claim:
- Direct staff costs – employees who have worked directly on the R&D project and include costs such as; gross salaries.
What does this include? Wages, overtime and bonuses, employer NI contributions, employer pension contributions and certain reimbursed business expenses. Independent contractors (or ‘externally provided workers’ – EPWs) and subcontractors can be included in a claim but there are some specific rules around what can be included in a claim.
- Software – Software which was needed for R&D or involved in R&D activities may be included but must have been developed / purchased for the R&D project.
Can I make a 100% claim on software? If the software was partially used for the R&D project, then its price must be apportioned. However general software such as email hosting, Microsoft Office, ERP and MRP software costs and website hosting would be excluded.
- Consumables – Materials and resources that are used up / consumed in your R&D process, such as water, fuel and power can be included in your claim.
Are all my material costs included? Costs can be either apportioned expenses or wholly R&D expenses. But you can’t claim for materials which were not used up in the R&D process or used for products which were sold onto a client.
- Subcontracted R&D – If a portion of your R&D project has been outsourced to another company for an agreed amount, you can include that in your claim.
If you think you may qualify for R&D tax credits please let us know and we can put you in touch with one of our partners who are expertly qualified to make the claim for you.
Further information can be found here