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Did you know that last year, businesses across the UK claimed a staggering £1.36 billion in R&D tax credits? That is all money that was spent developing new technologies, processes or products, and reclaimed by those companies to reinvest and spend all over again. R&D is the backbone of innovation in this country, and the government recognises just how important it is to actively encourage the exploration of new ideas. Which is why they created R&D tax credits. But did you also know that a huge number of businesses – particularly smaller ones – are missing out on that support, simply because they didn’t know it was there? We think this is a massive shame, so we wanted to share the basics of R&D credits with you today – how they work, what they are, and how you could claim them.
What Are R&D Credits?
R&D is a form of tax credit and allows your business to claim back any money it has spent on research and development activities. They were created to incentivise businesses to invest more money in research and development, in hopes of creating a more innovative business culture and bringing new ideas to fruition. In the UK, you have to be liable for Corporation Tax if you want to claim this particular type of tax credit, but if you are, you can claim back up to 36.2% of their development costs. Depending on your expenditure, this means businesses can claim hundreds of thousands of pounds back, ready to reinvest in new projects. So this is a valuable source of cash for businesses to invest in their growth, if they know how to use it.
There are generally two schemes for claiming R&D tax credits – the SME scheme which allows businesses to deduct an extra 130% of their qualifying costs from their yearly profit, and claim the tax credits, and the R&D Expenditure Credit (RDEC) which allows you to claim portions of things like salaries, NI contributions etc for bigger companies. These schemes both allow you to claim tax credits, but also go into other costs that can be reclaimed depending on the size of your business, and what the government expects to be spent by each type. If you are not sure which scheme you fall under, an R&D tax consultant like us can help.
Who Is Eligible For Them?
Companies that spend money developing new products, processes or services (or enhancing existing ones) are eligible for R&D tax credits. In other words, if you’re spending money on your innovation, you can claim some of that investment back. The scope for identifying R&D is huge – in fact, it exists in every single sector so it is always worth checking with an R&D tax consultant if you are eligible. But in general, to benefit from R&D tax credits you must:
- Be a limited company in the UK
- Be subject to Corporation Tax
- Have carried out qualifying research and development activities
- Have spent money on these projects
The HMRC criteria for R&D credits have been made purposefully broad, so that as many businesses as possible can take advantage. Whatever the size of your business or sector you are in, if your company is taking a risk by ‘attempting to resolve scientific or technological uncertainties’, then you are likely carrying out qualifying activities. Again, if you are not sure if your activities fit the bill, you can always talk to an R&D tax consultant, who will be able to help you.
How Do You Claim?
Claiming your R&D tax credits is actually a fairly straightforward process – once you know how it works. In theory, all you need to do is fill in the appropriate boxes on your CT600 Corporation Tax Return for the relevant amount and submit it to HMRC. However, if you just do that, you’ll probably find yourself facing an HMRC enquiry pretty quickly. R&D tax credits are dealt with by inspectors at a number of specialist units around the country, and they take a consistent approach as to what is expected when they receive a claim, and generally deal with all claims for the SME scheme (while the RDEC scheme has its own department within HMRC. If, as a result of this enquiry, HMRC discovers other areas within a company where they believe mistakes have been made, then they can expand the enquiry. And if they discover you have overclaimed, you may be facing a 30% penalty.
So, you need to make sure you submit your claim properly. When a claim is submitted, HMRC normally expects to see supporting documentation, showing (at a minimum):
- What R&D projects have been claimed for, and how they fulfil the requirements of eligibility under the legislation.
- Why the work within those eligible projects qualifies as R&D under the legislation.
- What process has been undertaken to ensure that only qualifying activities and allowable cost categories are included.
- The claim is made within 2 years of the end of the accounting period when the expenditure was incurred.
This is a more complicated process, and if you have not done it before or aren’t familiar with HMRC’s requirements, we recommend working with an R&D tax consultant like us to help you. We can help you ensure all documentation is complete and meets the standards of HMRC, that all eligible R&D expenditure within your business is identified, and that all ineligible activities and projects are filtered out before making the claim. This means you can enjoy the benefits of tax relief, without worrying about if it has been done correctly.
If you would like to find out more, or want some help with your R&D tax credit claim, just get in touch by emailing us at firstname.lastname@example.org, or call us on 01249 691360.