Is your business eligible for R&D tax relief?
First introduced by the UK Government in 2001, research and development (R&D) tax relief is designed to reward companies that invest in innovative projects. So what makes a company eligible for R&D?
While this relief focuses on innovation in an area of science or technology, that doesn’t mean it’s just for businesses in the tech industry. However, your company, your projects and the activities you’re claiming for will need to meet certain criteria to qualify. Let’s dive in.
Who can claim R&D relief?
R&D is a corporation tax-based relief, which means it’s only available for companies. Your company must also be a ‘going concern’ to qualify for R&D – in other words, it needs to be financially stable.
Businesses from many different industries can claim R&D relief, including manufacturers, logistics companies and healthcare providers.
You’ll also need to use a different R&D scheme depending on factors such as the size of your business. There are two different R&D schemes in the UK: the SME R&D scheme for small companies and the R&D expenditure credit (RDEC) for larger firms.
SME R&D scheme criteria
To qualify for SME R&D tax relief, your company must have:
- fewer than 500 employees
- and a turnover of under €100m or balance sheet assets of under €86m.
Under this scheme, profitable SMEs can currently deduct 186% of qualifying R&D costs from their annual profits before tax. Loss-making firms can also benefit from the SME scheme by claiming a tax credit worth up to 10% of their surrenderable loss.
RDEC scheme criteria
If your company doesn’t fit the criteria for the SME scheme, you’ll need to sign up for the RDEC instead. You’ll be eligible for the RDEC scheme if your company has:
- 500 employees or more
- or a turnover of over €100m and balance sheet assets of more than €86m.
Under the RDEC, large companies will receive a tax credit worth up to 20% of all qualifying expenditures.
It’s worth noting, however, that the rates for both schemes vary depending on which accounting period you’re claiming for.
Furthermore, if your company is part of a business group or other enterprise, HMRC will look at the total employees, turnover and balance sheets in that group to determine which R&D scheme you should use. You should talk to an expert to discuss your claim if you’re unsure.
What does an R&D tax relief project look like?
So now you know which scheme you qualify for — but what kind of projects are eligible for R&D tax relief?
HMRC says that R&D projects must seek to “make a technological advance” – but that’s not the only box you need to tick. You’ll also need to ensure that the advance:
- was relative to the industry baseline
- related to an area of science and technology
- involved a “technological uncertainty” that could not be easily worked out by a professional in the field.
What if my project fails?
The good news is a project doesn’t need to be successful to qualify for R&D. So long as it meets all the requirements set out by HMRC, you can claim R&D tax credits on a failed project.
What if I make an advance by mistake?
Unfortunately, you’re unlikely to receive R&D tax relief for advances you made by mistake. HMRC will not accept a claim unless your project seeks to make an advance from the outset.
Interestingly, Alexander Fleming’s accidental discovery of penicillin would not qualify for R&D under this rule.
Qualifying expenditure
The rules surrounding qualifying expenditure can be tricky to navigate, but you can usually claim for direct costs related to the R&D project such as:
- raw materials
- staff salaries
- software
- utility bills
- experiments
- project management.
Many indirect activities will also qualify for relief if R&D could not take place without them. Examples of indirect R&D activities include security costs, specialist cleaning services and training costs.
However, you’ll only be able to claim for the proportion of these costs that relate to your R&D project.
Making a successful R&D tax relief claim
With the UK Government clamping down on fraudulent claims and legislation always changing, navigating the world of R&D can be challenging.
As of 8 August 2023, companies also need to file an additional information form before HMRC will review their R&D claim. While this does give you the opportunity to provide more detailed information about your projects, it can also make the process more complicated and time-consuming.
If you’re thinking about claiming R&D on your corporation tax return, talking to expert R&D experts and tax advisers can give you the best chance of success.
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