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Spotlight On: Research & Development Tax Credits for SMEs

The expression cash is king has never been more relevant and, in this article, we examine Research and Development (R&D) tax credits and the cash benefit they can provide to your business.

Although it is not a new relief, R&D relief remains one of the most generous forms of Government funding. Aimed at innovative businesses, the relief reduces a company’s Corporation Tax liability and, in some cases, can yield substantial cash tax refunds.

However, it is still widely misunderstood by many businesses that could benefit from the relief, and as a result remains underutilised. You may already be making valid R&D claims, but are you maximising the relief due to you? You may have considered R&D, but not been clear on whether your activities qualify.

Here we demystify the relief and provide an overview of what constitutes R&D for the purposes of the relief, the hurdles to overcome and how to make a claim.

What is R&D for tax purposes?

R&D takes place when a company undertakes activities that aim to achieve an advance in a field of science or technology through the resolution of scientific or technological uncertainty. Such uncertainty exists when knowledge of whether something is possible or feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.

Whilst this may sound like a high bar to overcome, many more activities and projects fall within the definition of R&D than one may expect, and the relief does not exist simply for the benefit of large pharmaceutical companies or technology firms.

It is often the case that part of a commercial project will involve scientifically or technologically innovative work, and this can be viewed as a separate subproject, eligible for R&D relief in its own right.

R&D relief is available to a wide range of industries, not just Proptech, Fintech and Biotech. We have seen many successful claims made by businesses in retail, hospitality, manufacturing, construction and architecture, among others.

How does the relief work?

R&D relief is calculated on the amount of qualifying R&D expenditure that the company has incurred.

The relief gives the company a tax deduction equal to 230% of its qualifying R&D expenditure.

Where a company has tax losses as a result of the R&D claim, it can surrender those losses to HM Revenue & Customs (HMRC) in exchange for a 14.5% cash payment.

This corresponds to cash repayment of £33.35 for every £100 of qualifying expenditure incurred, meaning the tax authorities are funding one third of your R&D costs.

These are the rules that apply to SME’s, which are classified as a company (together with its group, if applicable) that has:

  • fewer than 500 employees
  • either an annual turnover not exceeding €100m or gross assets not exceeding €86m.

In addition, the company must not have received any State Aid or other grant funding and must own the intellectual property created as a result of its R&D activities.

If these conditions aren’t met, then R&D tax relief may still be available, albeit under a less generous regime.

What costs qualify for R&D relief?

The main qualifying cost for most businesses is the staff costs of people engaged in the R&D work. However, a number of other costs can be included and are often missed in claims, such as:

  • 65% of the cost of subcontracting specific elements of the R&D work to a third party, with some restrictions if the parties are connected
  • 65% of the cost of externally provided workers such as agency staff engaged to work on the R&D project, again provided the two parties are not connected
  • software licence costs, and consumable items used up in the R&D process, including fuel, power and water.

Where costs relate partly to qualifying R&D activities and partly to non-qualifying activities, relief can be claimed on the qualifying proportion of the cost. Again, this is often missed in valid claims.

How do we claim R&D relief?

The R&D claim is included in the claimant company’s Corporation Tax return and must be made within two years of the end of the accounting period in which the expenditure was incurred.

This means you have an opportunity to resubmit a tax return from the previous year if you believe you have qualifying R&D activities but did not make a claim in your original tax return. This could generate an immediate tax refund for your business.

It is best practice to submit a report to HMRC, along with the tax return, setting out how the various conditions for relief are met. Whilst this is not mandatory it can help address HMRC queries without a formal enquiry being opened which may delay the tax repayment.

Some business owners may wish to consider shortening their accounting period in order to accelerate their ability to make a claim, but the commercial implications of this should always be considered in advance.

Would you like to know more?

If you think your company may be undertaking qualifying R&D activities, or you would just like to understand more about R&D tax relief, please get in touch with your usual Blick Rothenberg contact or one of our experts to the right.

We have a wealth of experience of providing advice on R&D relief claims to companies in a wide range of industry sectors. We can help you to:

  • identify qualifying R&D projects
  • assess the amount of the claims and ensure they are optimised
  • prepare supporting reports for HMRC
  • complete and submit your corporation tax returns, including the R&D claims.
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