Research and development (R&D) tax credits are a UK government incentive launched in 2000 to reward UK companies for investing in innovation. Qualifying companies can secure a significant tax offset against their profits from their innovation activities via R&D tax relief.
As with each year, an increasing amount of money goes back into the UK businesses through this scheme; R&D tax credits are designed to encourage and stimulate economic growth – something the country needs now more than ever.
A bumpy start for the initiative
Even though businesses in the UK today can claim generous tax breaks on research and development, it was not always this way. The initial R&D tax breaks introduced in 2004 were reasonably high, but it was only in 2010 that it crossed the 200% limit.
The increase was apparently encouraged by British inventor Sir James Dyson’s observation that Britain might lose out on becoming a science hub if it did not review and increase the R&D tax credit relief.
Today, small or medium-sized enterprise (SME) R&D tax relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit along with the normal 100% deduction, to make a total deduction of 230%.
However, the rules surrounding this tax break can be quite hard to understand. That is why we have put together this handy guide breaking them down. But first, let us start with the basics:
What are R&D tax credits?
In the tax context, R&D refers to any activity pursued to advance science and technology and address current uncertainty in those fields. The guidelines state that the activity must lead to a ‘significant and perceptible’ advance and not just replicate what has happened before. In addition, the advancement of science/technology should occur due to concerted efforts and not as a lucky discovery or accident.
UK businesses engaging in R&D activity of this kind are entitled to a 230% tax break on the expenses incurred, including all consumables and staff costs as well some subcontract costs. In addition, loss-making R&D enterprises can claim a 14.5% tax credit of the surrenderable loss.
The guidelines state that the applicable R&D period starts when work begins to resolve the ‘scientific or technological uncertainty’ and ends when a solution has been found, or the work ceases. If problems arise later in the solution that requires new R&D, that may be included in the applicable period. However, routine tweaks and troubleshooting are not included here.
The R&D tax credit can be an excellent tax saving if your business engages in tech-related research. A big plus is that the tax credit can be claimed retrospectively for relevant work done in the last two years.
So even if you were unaware of it at the time, you could still benefit from the extra tax saving. Another plus is that the tax credit still applies even if the R&D venture failed to achieve the exact objectives. This is a big incentive for UK startups to take risks and tackle new projects.
How to claim an R&D tax break
The R&D tax break applies to your business if you:
- Improved significantly on an existing product
- Addressed key industry questions or uncertainties
- Found more efficient solutions to existing problems
- Identified new customer problems and found answers to them
R&D can be looking to solve a physical problem or via electronics; if you are developing software or apps, the projects most likely to be eligible are complex. They need to have used custom coding or involved your team in developing innovative technology. This means you could have:
- Trialled new computer code or materials
- Built bespoke software, websites, apps or CRM systems
- Created web-based apps you consider to be original and creative
If you feel the above points are relevant to your business, these are the steps you will need to follow:
- On your company tax return, place an X in box 99 and the sum multiplied by 230% in box 101.
- Add the enhanced sum to your profit and loss calculations in boxes 3 and 122.
- If you want to convert your tax relief into credits, add the due amount to boxes 87, 89 and 143 and mark the box stating ‘repayment due this return period’.
- If you make a repayment claim, you must pass a compliance check by HMRC first. This is where you provide supporting evidence for why your work deserves an R&D tax break and proof of your calculations.
- HMRC may pay you the entire claim amount in one go or make an interim payment first, and the balance after all enquiries are concluded satisfactorily.
Activities unlikely to qualify for the R&D tax relief include:
- Business processes that relate to improvements that are directly related to people and not technological improvements;
- Creating apps or sites using well-established technologies
- Doing work related to User Experience (UX), including design and content
Even if you fail to improve the products or processes, your attempts may still count as R&D-qualifying expenditure – this helps tech startups to continue experimenting with new ideas even when they do not have the means to fund them.
From 1 April 2023, licence payments for datasets, data processing costs, and cloud computing expenses will become eligible for qualifying expenditure.
Take the help of a tax consultant for R&D tax relief
Over the past decade, accountants have elevated their role as trusted business professionals. In fact, it is now the norm to discuss a business’s long-term goals and succession plans and even advise on pension schemes and investments. Discussing R&D tax should be a given.
Figuring out exactly which projects and costs qualify can be tricky, though, especially if you are new to filing these claims. That is why we recommend consulting a tax professional who can submit accurate records and advise you on the best time to make your claim.
For instance, you do not necessarily have to wait until you have a full year of accounts to file your claim – if the first, say, four months have involved highly high costs, submit a claim and get the money back so that your business continues to have enough funds.
If you have any questions about R&D tax credits, contact us. At Birdfynn Accountants, we understand what counts as a qualifying expenditure, how to apply for relief, and how to tackle a compliant claim. Get in touch with us today!
