R&D Tax Credits Explained
What are R&D Tax Credits?
The Research and Development tax credit scheme is the main source of government support in the UK for innovative companies. For almost twenty years, FI Group has been helping companies to finance their innovative projects through the management of R&D tax incentives and other financial sources
How do I know if my project is
eligible for an R&D Tax Credit claim?
As a general rule, if you have employed professional engineers, developers or other technical specialists to develop an innovative or new solution to an existing problem and can demonstrate significant expenditure on this, then it is very likely that the above criteria will be fulfilled.
- Technical Uncertainty – if the uncertainties that the project tackles are readily deducible by an experienced professional, i.e. the solution can be easily found, then it is unlikely to be R&D.
- Innovation – if the project delivered an outcome classed as common knowledge, then it would fail the innovation test for R&D.
- Cost – whilst there is no lower limit on expenditure, the higher the amount spent on a project then the more likely it will be to qualify for tax relief (due to the high cost of the majority of research and development).
- Qualifications – If you have been employing ‘competent professionals’ such as qualified technical experts in a specific field then this could indicate R&D eligibility.
What costs can I claim back?
The definition by HMRC of what expenditure you can claim for means that there are several choices when it comes to claiming R&D Tax Relief. If you can demonstrate, for example, that your spend on payments for staff, subcontractors, or other workers (including crucial employer costs such as pension contributions) went towards research and development costs then you will be able to claim on it.
You’re also able to apply for R&D tax deductions on the basis of your spend on materials as well as your staff costs. For example, any spend you make on vital commodities (such as power costs, or any basic needs for your factory or workspace, or any heating costs incurred as a result of R&D) can be claimed as a cost, so it’s worth making the most of it.
For those companies with a more modern, technological twist, meanwhile, the rules governing R&D tax credit claims are also applicable to certain types of software – one of our Tax Consultants can advise you on the specifics of these parameters.
What does my business need
to do to claim R&D tax credits?
Generally speaking, under HMRC’s rules your business has to be engaged in working out the answer to some kind of “scientific or technological uncertainties” in order to claim R&D credit.
However, this is a nebulous concept – so there are plenty of possible ways you can gain R&D relief.
If you produce a new product, for example, it’s possible that you will be able to claim for some of the research that went into it. The same goes for companies who create a new service or process – so even if you’re not in the manufacturing business, you may still be able to claim R&D credit.
It’s also worth noting that, if your research and development efforts cover changes made to a product (or, again, a service or product) you developed previously, this can also be considered a candidate for your R&D allowance.
There are a couple of important caveats, too, both of which widen the pool of beneficiaries when it comes to the R and D tax credits rules.
Firstly, agencies or providers who carry out one or more of the required actions described above on behalf of their clients may still be able to claim R&D tax credits. In addition, it doesn’t matter if your attempts at research and development were successful: there’s still a chance you can claim a research and development credit even if it didn’t work out, so make sure to keep all your documents and evidence in order to make a claim.
What is the minimum
expenditure for an R&D tax credit claim?
There is no minimum expenditure on qualifying R&D required in order to make a claim for a tax credit. This wasn’t previously the case; until 1st April 2012 it was necessary to spend at least £10,000 on qualified research and development projects to be eligible for a claim.
Thankfully that it not the case now, opening up the scheme to more SMEs and start-ups. However, it is the case that smaller amounts of expenditure may suggest that the project wasn’t necessarily true R&D. This is because of the costs involved in hiring the experts needed to develop new solutions to existing problems, as well as software and materials, implies that a higher spend corresponds to the existence of R&D.
If your expenditure is small, but you still consider it to be true R&D, taking advice from an expert R&D Tax Consultant at F. Initiatives can help you to produce a robust Technical Report for HMRC to ensure you get the rewards you deserve for your innovation.
Can SMEs claim for R&D tax credits?
Yes, SMEs can claim research & development (R&D) tax credits, provided that the following conditions are met:
- They are subject to UK Corporation Tax
- The company is a going concern and not going into administration
- The SME’s balance sheet meets monetary thresholds
- The SME delivers a trade which relates to R&D activities that it seeks to claim for
It is a myth that being in receipt of a subsidy or grant funding excludes a company from claiming R&D tax relief. If you have received such funding, then it is likely that you can still claim for some R&D expenditure under the SME Tax Relief Scheme.
Furthermore, it is likely that you can also claim the rest of the expenditure under the large company scheme (RDEC). FI Group online claim platform, My R&D Claim, is specifically designed for start-ups and SMEs and automatically calculates what expenditure can be claimed under which scheme.
Initiatives always encourages businesses to seek specialist advice to determine which projects may be eligible for tax relief – this is especially true when additional external funding sources are involved. Our team can help you to assess your eligibility for R&D tax credits and grants, along with other types of public funding that is available to UK businesses for R&D development activity.
How far back can I go when
claiming for R&D tax relief?
The time limit for a research & development tax relief claim is two years – measured from the end of your business accounting period. This ties in with the deadline for amending any Corporation Tax on your return. If you are a business operating in your first year then you may have a different timeline, with your incorporation date creating the registration date, and your first period of accounting being defined as twelve months from the end of that nominated month. This needn’t apply going forward as you can choose to amend your accounting period.
When will I receive the
payment for the R&D tax credit?
HMRC advise that claims take a minimum of eight weeks to process from the point of submission, although this is sometimes shorter it may be significantly longer for large or complex claims. Once your claim is approved it can take up to six weeks to receive the payment from HMRC.
It is always worth allowing extra time in case your claim is taken to enquiry – your FI Tax Consultant will be able to advise on the likelihood of this ahead of submission. We can also help you to assess how far back your particular business can claim for.
What is a “Competent Professional”?
The HMRC legislation talks about “competent professionals” as being those that lead your research and development activity. This refers to someone in the industry with the right qualifications, experience, skills and track record for the job in hand. For example, this might be a process engineer in a chemical manufacturing plant, or it might be a Chartered Accountant in a finance firm.
There are no exact requirements for what constitutes a competent professional, so don’t worry if you think your team won’t meet the criteria. HMRC understands that older employees may not have specific qualifications as started out in their industry at 16 and have worked in it ever since – they are still considered competent professionals.
Essentially, within your business, this individual is the person who is best placed to make a judgement about the activities that count towards R&D. A ‘competent professional’ within the business must assess the projects which qualify for an R&D tax credit, the project boundaries and the applicable activities. They will then apportion expenditure to those identified activities. It is vital that accurate and detailed biographical information of your technical professional is included in the technical narrative that you submit with your R&D tax claim. This demonstrates to HMRC that you have applied due care and attention and applied the correct boundaries when assessing qualifying activity.
How to prepare for an R&D Tax Claim
Know which scheme you qualify under
One of the first things you need to do when preparing for your R&D tax credit claim is to determine which scheme you qualify under. This is either going to be the RDEC scheme or the SME scheme. You will fit into the latter category if you have fewer than 500 staff and you have either 86 million EUR gross assets or 100 million EUR turnover. If your business is bigger than this, you will file your claim under the RDEC scheme. In terms of qualifying expenditure, both schemes are similar. However, the SME scheme tends to be more lucrative because the calculations differ.
If you are an SME that has received grant funding or subsidies then you may also be eligible to claim under RDEC as well as the SME scheme. The rules around this can be quite confusing but our Tax Consultants have submitted 100s of similar claims and will be able to help you navigate your way through it!
Figure out what qualifies and what doesn’t.
Once you know the scheme your business comes under, you then need to determine what qualifies for R&D tax relief and what doesn’t. After all, the last thing you want to do is unintentionally raise a red flag at HMRC, which could lead to an enquiry into your business.
So, what does qualify For the SME scheme it is consumables, externally provided workers, subcontractors, staffing costs and software licenses. For RDEC it is the same but also with “contributions to independent research” and subcontractors under RDEC must be either a charity, an individual, a partnership of individuals, or a “qualifying body”. For either scheme you can claim for payments made to clinical trial volunteers. A lot of business owners make mistakes when it comes to filing their claim, and one of these errors is claiming directors as subcontractors. This is not allowed. Another error is claiming for the HMRC tax year, rather than your company’s financial period. Also, remember to file qualifying development as ‘intangible assets’, instead of ‘tangible assets.’ The latter is much more complex. With over 25 years’ experience in R&D Tax, the Consultancy Team at FI Group can assess what qualifies for you thoroughly and efficiently – meaning you can get on with the actual R&D!
Choose the right project
Once you’ve dealt with what qualifies and what scheme you fall under, you need to consider the actual work you have carried out. Ensure you choose the correct projects to claim for when submitting your technical narrative. You should try to include descriptions which cover at least half of all the expenditure included within the claim. In most cases, more than one project will be included in a claim.
Seek professional assistance
Seeking the help of a qualified professional is by far the simplest way to claim your R&D tax relief. Make sure to choose a consultant with competitive rates and a long track record of successful claims. At F. Initiatives we have both an extensive track record in the UK and Europe and 100% success rate on all UK claims so you’ll be in safe hands.
How FI Group helps you claim R&D tax credits
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- Initial Assessment – We always suggest an initial telephone conversation to discuss the nature of your business and the types of projects you are undertaking or have completed. This allows us to assess early in the process whether there is any potential research and development that qualifies for tax relief. This is part of our commitment to ensuring the whole claim process is time-efficient for you, and, our experts are so experienced that it doesn’t take them long to determine the presence and level of qualifying expenditure in your business.
- Getting the details right – Once we’ve determined that your business has projects that will qualify for R&D Tax Relief we will arrange to come and meet with you at your premises to identify all of the projects that should be included. There may be areas that qualify that you have previously had discounted by advisors but, as allof our Consultants are Technical Experts in their scientific and technological fields, we are able to uncover sources of claimable expenditure often missed by other consultancies. We will also collate the names of the project leads or employees responsible for the R&D activity and the Financial or Human Resources head responsible for salaries and utilities. This ensures that we can arrange to collect the information we need without being a burden to you and your employees unnecessarily.
- We compile your claim – We will then arrange to conduct a series of technical interviews with the relevant employees. These can be done over the phone or in person – whichever is more convenient for you – and it will provide us with all the project details and financial information we need to compile your claim. At this stage we will produce an estimate of all the eligible R&D expenditure and what you can expect to receive back. This will also give you an estimate of the fees payable to us, although we do not invoice you for this until you have received your money from HMRC.
- We make it happen – The next step is to complete your R&D tax credit claim and send it to HMRC. We’re expert in this process of how to claim R&D tax credits and have already helped thousands of business Through this process we’ve developed a thorough method for making these calculations which means your claim will be highly detailed and meticulously accurate. Once we’re happy we’ll provide the report to your accountant so they can amend your CT600 Corporation Tax Return with our calculations. We always work very closely with our customers accountants to ensure a smooth submission process.
- We deal with HMRC – Now, we wait. We’ll make sure the tax office has all the details they need from your research & development claim. And in the exact time frames they require it to claim R&D tax credits. We take pride in getting this right. We’ll follow-up on how your claim is going, and deal with any questions the authorities have about it. HMRC advise that it will take a minimum of eight weeks to process a claim, although it can be sooner. In some cases, HMRC will open an enquiry about tax credit claims. If that happens with yours then you can leave it in our hands at no additional cost, although we have not had a single enquiry opened against any of our UK claims so far!
- You receive your credit – Once the paperwork is done it usually takes HMRC up to six weeks to credit your bank account. In terms of your Corporation Tax, your benefit will depend on the current health of your business. If you are in profit, then your tax bill will fall. If your business made a loss for the period, you get a cash credit.
Why FI Group?
- We provide a smart, experienced and fast service which offers peace of mind on all the little details of your R&D tax credit claims.
- We don’t charge unless we’re successful. Our fees are taken as a portion of the credit or repayment HMRC gives you.
- Our terms of service have no nasty surprises or hidden extras.
By partnering with us you have the security of our international reputation, and the confidence of our UK Team, to maximise your benefit.