Introduction to R&D tax relief
In the UK companies can claim tax relief if they have carried out qualifying R&D activity. There are two schemes in place, one for SMEs and RDEC for larger companies, both administered by HMRC and designed to boost innovation by supporting businesses that seek to improve their products and processes or overcome challenges or uncertainties.
SMEs can get back up to 33% of the amount they’ve spent on qualifying R&D. Claims made under the RDEC scheme can get more than 10% of their qualifying R&D spend refunded. Understanding which scheme is correct for you mainly depends on the size of your company, but there are other factors that need to be taken into account.
We can guide you through that process to make sure you get the full amount you are entitled to under the appropriate scheme.
The definition of R&D could be wider than you think. An R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. You can claim against certain costs that are allowable for tax purposes which might include:
• Employment costs
• Subcontractor costs
• Externally Provided Workers (EPWs) costs
• Software costs
• Consumable item costs including materials and utilities like light and heat
• Clinical trials
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Are you eligible to claim R&D tax relief?
You may already be aware but here in the UK companies can claim tax credits for qualifying R&D activity. The R&D tax relief schemes are administered by HMRC and are there to support businesses who try to improve their products and processes or overcome challenges.
Five questions to ask yourself:
1. Do you develop new or regularly improve, products, processes, technology, and/or software?
To qualify the activity must achieve (or attempt to achieve) an advance to the overall field of science or technology (or an appreciable improvement achieved as a result of an advance) and not just a case of increasing your company’s own knowledge.
This could be in relation to the main function of your company or a smaller part. For example, you could be a cutting-edge business working on a brand new technology, perhaps pharmaceuticals or life sciences. You could be a business where constant change and improvements are needed such as a manufacturing business.
In some types of businesses it is unlikely that you are relying on science or technology to get the job done; such as a florist, taxi driver, or care home.
2. How challenging is it for you to make these improvements?
There needs to be uncertainty of the outcome in order to be qualifying R&D activity. If you have total certainty that the improvement you were attempting would work, in exactly the way it was expected to, with only minimal effort, it is very unlikely to be considered qualifying R&D activity.
Another way to consider this is, are you using existing knowledge, capability, and skills; if so it is very unlikely to qualify. If however, you had to create new solutions to achieve the desired outcome then these could potential qualify.
3. How easy is it for you to find resources to help with these activities (such as specialist contractors or online resources)?
At the time you started the R&D project(s) what level of information was available in the public domain via the internet, trade magazines, patent applications, competitor websites, etc. Could you find specialist contractors or online resources to show you how to overcome the uncertainties your company faced.
4. How certain were you that you would get it “right first time”?
In other words, did you achieve the success or expected outcome on the first attempt, without going back to the drawing board for a second, third, or fourth time?
5. Did it take numerous attempts to get it right?
Have you invested in failed projects or developed products that are never launched?
Even if the outcome sought by a project is not achieved or not fully achieved, R&D can still take place. In fact an unsuccessful project could satisfy one of the tenets of evidence for qualifying R&D activity. It could be evidence of risk-taking and uncertainty.