The latest statistics provided by HMRC regarding R&D tax credits highlight the real value of R&D tax credits to the companies which claim them and the economy as a whole were revealed.
Did you know that the average claim values are:
- • £53,876 for smaller businesses, and
- • £272,881 for larger businesses
In 2016-2017, £3.5bn in R&D tax credits were successfully claimed by UK companies and the boost to the economy these claims are estimated to have provided came to £8.2bn in R&D investment.
SMEs are taking more and more advantage of R&D tax credits with the number of companies which have made a claim rising to an impressive 34,060.
What are R&D tax credits and how can an accountant help you access them?
For a claim to be considered for research and development tax credits, there must be no guarantee of success when you start the related work.
Being paid R&D tax credits is a recognition by HMRC and the Government that there is a risk to the work that you’re undertaking which may, at some point in the future, not turn into a viable product or service meaning that all the money you spend developing it is wasted.
HMRC’s terminology is that there is a “technological or unscientific uncertainty”.
When claiming R&D tax credits, you must demonstrate to HMRC what the uncertainty was and how that uncertainty could not be easily overcome by someone who is professional in the relevant field.
This applies whether you are devising a brand-new product, process, or service or whether you’re adapting a current product, process, or service.
R&D tax credits – costs
You can claim 100% of your costs for your R&D tax credit against:
- • the wages of your staff directly involved in the R&D project (same for staff providers too)
- • anyone paid as part of a clinical trial
- • the costs of conducting the clinical trial
- • consumable materials used in the research
- • transformable materials used in the research
- • computer software used in the research
- • utilities, fuel, and water costs incurred as part of the research
- • capex (the R&D capital allowances scheme means you can write down 100% an uncapped amount on IT systems, R&D facilities, and plant and machinery)
It is important to note that If you outsource or subcontractor part of the research and development to a third party where there is no IR35-equivalent relationship, you can get only back up to 65% of those costs.
R&D tax credits – how much can your company claim back.
It works like this. You have two years at the end of the relevant accounting period to make an R&D claim. You make your claim in your corporation tax return or amended corporation tax return (if you’re carrying the credit forward or backward)
For every £10 your company spends in R&D costs, you can bring down your corporation tax liability by an additional £13. This is equivalent to a 230% rate of relief.
Let’s look at a company spending £150,000 on allowable R&D expenses which has made a profit of £185,000 in a tax year…
R & D Expenditure: £150,000
R & D Relief: £150,000 x 130% = £185,000
Normal taxable profit: £185,000
Taxable profit minus R&D relief: £185,000 – £185,000 = £0
Revised taxable profit: £0
This company has been able to use all its R&D tax credits to take its level of profit on which corporation tax can be paid from £185,000 to £0. With corporation tax at 19%, this represents a saving of £35,510.
What if your company is making a loss? You can do one of two things. You can carry the loss forward or backward (up to 2 years) or you can apply for a cash tax credit.
If you were making a loss of £185,000 with £150,000 allowable R&D expenditure, this is how it would work out for your firm.
Total loss: £185,000
Corporation tax: £150,000 x 130% = £185,000
R&D tax credit (expenses * 130%): £185,000
Adjusted loss:£185,000 + £185,000 = £370,000
Adjusted loss (14.5% of £370,000): £53,650
You can obtain a refund of 14.5% from HMRC against your R&D activity, in this case £53,650.
You can carry the £53,650 forwards to offset against future profits or backwards to a previous accounting period.
R&D tax credits – how to claim
You make a claim for R&D tax credits on your CT600 corporation tax return.
HMRC will expect you to provide details of the money you’ve spent. They’ll also look for a description on what your project is, an itemised breakdown of the associated costs, how you arrived at the figure of the tax credit you’re seeking, and a description of the “technological or unscientific uncertainty” your project overcame or is seeking to overcome.
If you can your loss backwards or forwards, you receive no direct payment from HMRC as such however your corporation tax bill will be lower.
If you want to receive a cash refund, HMRC estimate that it will take 4-6 weeks for the payment to reach your bank account. The sum will be paid into the account registered with HMRC.
R&D tax credits – is there anything I can’t claim for?
Not all R&D related expenditure is claimable, including:
• recruitment consultants’ fees who find you your R&D staff
• any telecoms or data charges associated with a project
• consultants, staff, company directors, or workers through agencies not supplied by a staff provider and whose employment contracts are not with your company
Could you make a claim?
Although the R&D scheme is not a complex one to understand, it can be complicated to provide HMRC with the necessary paperwork they need to grant the credit.
Here at TFMC we offer the full range of accounting services and a quick call us on 0800 470 4820 could determine whether your project qualifies for this valuable tax relief. Alternatively drop us over an email at firstname.lastname@example.org and we will get back to you ASAP.