Research and Development relief (or R&D tax credits) is a government incentive that is designed to reward those UK companies for investing in innovation. It is a valuable source of cash for your business to invest in accelerating your R&D as it can help you fund business growth.
If you use science or technology as part of your innovative process or product, then that means R&D Tax Relief is available to you as a UK Limited company. You must remember though, your technology will need to be innovative, just being commercially innovative isn’t enough.
The scheme comes in two different variants: Large company (RDEC) and small company (SME). It is also important to note that small companies that may have received grant funding or subsidies may have to use the large company scheme instead.
If you are a small company, you could be paid upwards of 19% depending on taxable profit/loss, whilst a large company could benefit from just under 10% of R&D cost.
Questions in regards to R&D tax relief can vary from project to project. Some of the key R&D questions to consider are those established in the BIS Guidelines. Some of the questions we would recommend you think about are the following:
To help with answering the above questions you should refer to the HMRC guidelines which helps to provide context for the above. Many of the terms you will need to use are provided within the document. It can be a long and laborious process going through each definition and that is where our R&D consultants can step in and help explain the process to you and how it could relate to your industry as well as the activities you are undertaking.
The short answer is yes. Under the SME Scheme, Loss making companies are eligible to claim from HMRC. In addition, Loss making SME companies also have the option of not surrendering the R&D loss but instead carrying the loss forward/backwards against profits.
For a large company or a small company claiming under RDEC, a payable RDEC is calculated based on several caps and offset. Providing a loss-making company has enough PAYE staff on R&D to cover the RDEC amount an RDEC will be paid.
The calculations depend on your current situation, but as a rule of thumb, a claim that just generates tax relief can be worth 24% of the qualifying costs, whilst the R&D Tax Credit claim can be worth between 18% – 33% for SMEs.
HMRC aim to make payments to SMEs within 28 days for those claiming R&D tax credits. For a large company it may take a little longer to pay due to the greater complexity of their business. However it’s important to note that this does not include the 10 days it can take for the money to hit the bank once the claim has been approved.
The speed at which HMRC pay out your claim can be affected by seasonal availability and internal workloads. In particular, payments during the peak periods for company year-ends (March, September and December), may take longer due to the volume of payments being processed.
In most circumstances a claim does benefit cashflow, however if there are existing reliefs already in place (such as a group or charity for example), then this R&D claim might be replacing those. In terms of cash it’s important to consider your current tax position as early as you can in the R&D claim as to whether it will benefit you. Under the RDEC steps involving caps and offsets it is possible that the claim will create an RDEC to carry forward.
An SME Company need to meet the following requirements:
Be aware that if your staff headcount is lower than 500, but you exceed both the turnover and the gross asset thresholds you will technically fall into the large company class for R&D tax credit purposes.
If you think there are some additional aspects that need to be included in the picture such as partner enterprises, we would recommend getting in contact with one of our R&D consultants so they can help see if you qualify.
If a company changes their SME status during the year and it has been an organic, then the status does not change until the second year. As an example, if an SME becomes a large company in the first year and is also considered to be a large company in the second year, an SME claim can be made in year 1, however the claim would need to be made under RDEC in year 2.
Remember: if your company is taken over or sold, the change in status is immediate.
The main aspect to consider is where your company is in terms of the SME thresholds at the end of your accounting period.
Unfortunately, if a company is currently in liquidation or its registration ceases, then it cannot go on to make an R&D claim as the company needs to be trading to satisfy the criteria. If, for example, the company is absorbed, it would make sense to make an R&D claim before the status of the company is changed.
If the business entity is subject to UK corporation Tax, then this should be possible. LLPs don’t pay corporation tax and charities are usually exempt. There are some instances where a community interest company (who would pay corporation tax on profits) could make a claim.
Unfortunately, sole traders and partnerships made up of individuals do not qualify for R&D Tax relief. However, a joint venture or partnership which is made up of limited companies would qualify with each of the limited companies claim dependent on how the cost were split in the partnership.
The short answer is no. Companies that are in a group would claim as limited companies, where group relief may factor into the consideration when it comes to calculating the claim benefit. Groups need to be considered collectively when it comes to assessing their status as an SME. Talk to one of our experts to find out more.
The main difference stems from the accountancy handling. If you’re an SME with an R&D claim, this generates an enhanced deduction with reduces profits and creates or increases losses. It is a tax adjustment in the accounts which is not taxed.
An RDEC claim differs as it is instead a straight percentage of the qualifying cost treated as income.
If you’re putting in a claim for R&D, it is considered to be a little more straightforward than a payable RDEC which involves a process of offsets and caps.
When it comes to eligibility and qualification, the guidelines are the same, however some of the issues are treated differently. An example of this are grants and subsidised R&D require a special understanding in the SME scheme, but aren’t an issue in RDEC.
No, this restriction was removed on the 1st April 2012.
No, you cannot claim expenses you have not paid as an R&D expenditure. You can include accrued costs, but these need to be paid at the time of the claim being made.
R&D expenditure relates to revenue expenditure, so the usual rule of thumb is no. It is however possible under the intangible assets regime to capitalise revenue expenditure. If the expenditure is capitalised in the accounts, it could still qualify for tax credits if it can be deducted from the profits in the tax calculations.
The boundary of costs can vary from project to project. There may be multiple facets to a project which are running for different lengths of time, all of which are contributing to resolving the scientific or technological uncertainty or end you are reaching. The R&D claim can be made to those particular strands that relate to the technological or scientific advancement. You can also claim the staff costs that relate to indirect supporting activities within reason.
We would recommend keeping as detailed records as possible when it comes to anything accounts or tax return related. That way, you are in a much better position when it comes to preparing for your R&D claim.
Sometimes, an R&D claim can be seen as a distraction from the day-to-day operations, but if the average SME R&D claim is worth roughly £60K tax free, then it’s surely a worthwhile cause to ensure your claim is as strong as it could possibly be.
If you are unable to provide ongoing records, then making sure you have strong end of year records which include aspects such as cost and narratives can be of value.
If you’re unsure, then feel free to get in contact with one of our R&D consultants who would be happy to chat with you about this.
We believe that an R&D claim is definitely worth applying for if you qualify. Whether you operate a large limited company or a brand-new startup, you can benefit from research and development tax relief if you’ve made eligible expenditures within the last year.
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