What is R&D tax relief and why should I care?

Research & Development (R&D) tax relief supports companies that work on innovative projects in science and technology. You can even claim on unsuccessful projects. I am only referring to the SME programme in this article.

It is available to all sectors, so long as you are UK PLC or limited company. The main criterion is that the work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science – like economics – or a theoretical field – such as pure maths.

The project must relate to your company’s trade – either an existing one or one that you intend to start up based on the results of the R&D.

To get R&D relief, you need to explain how a project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

Your project may research or develop a new process, product or service or improve on an existing one. The process, product or service can still be an advance if another company developed it but is not publicly known or available such as trade secrets, recipes, and fabrication methods.

Some practical examples of qualifying activities and what R&D might look like in different industries would be

  • Consulting with experienced staff or external consult
  • Defining technical objectives
  • Assessing technical feasibility
  • Predicting and preparing for technical issues
  • Allocating and managing resources
  • Project managing technical aspects of the project
  • Identifying, analysing and classifying issues
  • Creating software specifically to help solve a technical problem
  • Building and testing prototypes of the intended product
  • Building and testing software iterations of the intended product
  • Building and testing pilot plants or hardware
  • Performing experiments
  • Designing and running trials
  • Carrying out other design, testing and analysis required to overcome technical difficulties

Costs that you can claim are:

  1. Staffing costs made up of:
  • Gross salaries (including wages, overtime pay and cash bonuses);
  • Employer NI contributions;
  • Employer pension contributions; and
  • Certain reimbursed business expenses.
  1. Subcontractors 

You can include 65% of payments made to unconnected parties.

  1. Externally provided workers (EPWs)

Common examples include agency staff, contractors, and freelancers, that are doing work for you, to your specification and supervised by you.

  1. Consumable items

Materials consumed or transformed in your R&D process are known as consumables: this category includes water, fuel, and power. Common examples include materials for the construction of prototypes or use in trials.

  1. Software

Expenditure on computer software involved in R&D activities is eligible, along with software partly used for R&D, for which we make a reasonable apportionment. 

  1. Clinical trial volunteers in the pharmaceutical industry

There are five possibilities for how you could receive your benefit. In some instances, you can choose the one that is most appropriate to your circumstances.

  1. A cash rebate

You can claim R&D tax credits retrospectively for two previous accounting periods. If this claim is for a period in which you have already paid your Corporation Tax, we will amend your CT600, and HMRC will issue you a cash repayment.

  1. A Corporation Tax saving

If you are yet to pay your Corporation Tax, you might receive R&D Corporation Tax relief in the form of a reduction in future liabilities. If you are profit-making, this would be applicable. Your R&D tax credit claim will reduce or eliminate your Corporation Tax liability.

  1. Loss reliefs

If you are loss-making after your R&D tax credit claim, you can elect to carry back the R&D relief to the prior year at an enhanced rate if you were previously profitable. Alternatively, you can carry it forward, offset it against future profits, or surrender it for group relief. Loss carrybacks and group relief can generate an immediate tax benefit in the form of a cash rebate for tax paid or Corporation Tax savings.

If cash flow is not such a concern to you, you can elect to carry forward the benefit, and this option will often deliver better future value than a cash credit. However, an immediate cash injection is often difficult to ignore when your future profitability is unknown.

  1. Cash credit

As an alternative for a loss-making company, you can choose to receive a cash payment from HMRC in exchange for the surrender of your R&D enhanced losses. This option is helpful for companies who need a boost in cash flow, and it can be worth up to 33p for every £1 spent on R&D.

  1. A combination

You can reclaim the Corporation Tax you’ve already paid when your taxable profit becomes a loss due to the R&D tax credit claim (2). Or you could make a Corporation Tax saving (1) and utilise the losses by carrying back or forward to offset against profits (3). Alternatively, you could claim a cash credit in return for surrendering those losses (4).

The average claim in the UK is £56k so this could be a valuable additional income for your business. It’s yours, it’s not a loan, you can use it for anything you choose.

Sam Watkins
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Sam Watkins

With her years of R&D Tax experience, Sam will work with you to reduce your payments, or claim refunds for you so you can relax, knowing your finances are in safe hands. She works with limited companies of all sizes who have been trading at least two years. When Sam is not solving the tax relief woes of businesses like the treasure hunter she is or out networking looking for new clients, you can find her roaming the woods around where she lives with her partner. She is also partial to curling up with the Guardian crossword and a cuppa!