Through Research and Development (R&D) tax relief or tax credits, companies that develop or improve new or existing products or processes may be eligible for a valuable tax break.

Here’s a closer look at R&D tax relief eligibility, qualifying expenditure, the claims process and how to get help.

What is R&D Tax Relief?

R&D tax relief is designed to encourage innovation by reducing the tax liability of companies that invest in research and development. For companies that are in profit, the relief can result in a reduction of your Corporation Tax (CT) liability, resulting in a lower tax bill and/or a possible refund for previous years.

For loss-making companies, a successful R&D claim will increase your loss, which can then be set against past or future profits for CT purposes. As an alternative, you may be able to surrender the loss to HMRC in return for a cash payment.

Is my company eligible?

R&D tax relief can be claimed by companies liable to UK Corporation Tax. To be eligible to claim under the SME scheme, your company must have fewer than 500 staff and either an annual turnover of no more than 100 million, or gross assets of no more than 86 million.

Companies that are too big to meet the SME criteria can claim under the (less generous) Research and Development Expenditure Credit (RDEC) scheme. In some situations, SMEs will need to claim under RDEC; for instance, where they are already in receipt of grants that would qualify as state aid, or where they are subcontracting for a large organisation.

Can sole traders or partnerships apply?

In a word, no. In fact, the opportunity to take advantage of R&D tax credits can be a very good reason to consider company formation for your small business.

How much can I get under the R&D SME tax relief?

It’s worth remembering that the costs you incur in researching and developing new products and processes are classed as operational expenses in any event. These costs should already be deducted from annual profits for the purposes of your CT calculation. SME R&D tax relief is an enhanced tax credit on top of this basic deduction.

The amount of relief you can get depends on whether your company is in profit or loss.

Profit-making companies

You can deduct 130% of qualifying R&D costs from yearly profit, on top of the normal 100% deduction, to make a total 230% deduction. So let’s say your gross profits for this year are £500,000. You have spent £100,000 on qualifying R&D over the same period. As a starting point, you can offset those costs against profit, reducing your taxable profit to £400,000. The R&D relief lets you go a step further, by deducting an extra 130% of qualifying costs from profits. This reduces your taxable profit from £400,000 to £270,000.

Loss-making companies

You can add an extra 130% of qualifying R&D costs to your trading loss on top of the basic calculation of those costs, to make a total 230% addition to trading losses.

Depending on your company’s financial position, you can then opt to carry these losses forward or back to be offset against past/future profits. Alternatively, you can claim a tax credit, worth up to 14.5% of the surrenderable loss.

What counts as R&D?

You don’t have to be a rocket scientist to claim R&D relief. Innovation can come in many forms. Here are just a few examples:

• The manufacturer working on improvements to an existing product.
• The insurance brokerage developing innovative methods of capturing, storing and protecting claims records.
• The construction company building its own software to manage contracts and supply lines.

HMRC’s definition of R&D is a broad one. As a general principle, if your company is attempting to ‘resolve scientific or technological uncertainties’, it may count as a qualifying activity. This usually involves either:

• The creation of new products, processes or services, or;
• Making changes or improvements to an existing product, process or service.

R&D work starts when you seek an advance in science or technology and ends when the uncertain elements of the project have been overcome. For example, the costs of technical research, prototyping and beta testing for a new product may qualify. However the costs incurred in your first general production run and in promoting your new product would not.

What specific costs qualify for R&D relief?

These include the following:

• Employee costs. A proportion of the costs of employing staff to reflect the amount of time engaged on the R&D project.
• Subcontractor costs. You can claim 65% of relevant costs of using a subcontractor for R&D activities.
• Software. This includes licence fees purchased specifically for the R&D project, or a reasonable share of the costs of software partly used in the project.
• Consumable items. Examples include materials, equipment and utilities used in the R&D project.

How to claim

A claim for R&D relief can be made up to 2 years after the end of the accounting period it relates to.

You claim the relief by completing the relevant section on your full Company Tax Return (CT600). View our range of Corporation Tax services here.

R&D tax relief services from MJH Accountancy

Our friendly, professional team is on hand to provide help with all aspects of R&D tax relief, including the following:

• Eligibility checks
• Assistance with identifying all relevant qualifying business costs
• Apportioning salary and other expenses to the R&D project
• Assessment of your wider financial position to help you decide whether to carry any losses forward or back, or to claim a tax credit
• Compiling evidence in support of your claim
• To get to work on your potential R&D tax relief claim, contact MJH Accountancy today.