R & D Tax Relief

Date: 18th March 2021

What is R & D tax relief?

In 2000 the UK government introduced a scheme to encourage scientific and technological innovation. R & D tax relief allows companies that carry out qualifying R & D related to their trade to claim an extra corporation tax deduction for certain qualifying expenditure.

This applies to all types of small to medium UK businesses undertaking research and development.

Example industry sectors include Manufacturing, Software, Science and Technology, Engineering, Agriculture, Food and Drink, Retail and Wholesale, Professional and Consultancy Services and Construction.

The UK government have pledged to run R & D tax credits until 2032.

Can R & D tax relief be claimed by an individual or sole trader?

Individuals and sole traders do not pay corporation tax so R & D tax relief cannot apply. It makes sense therefore to plan ahead and register a company before embarking on a significant R & D project.

What does our company have to do to qualify for the R & D tax credit SME scheme?

You have to attempt to overcome scientific or technological uncertainties at your own risk by creating new or enhancing existing products, services, software or processes. This is qualifying R & D activity.

Other qualifying criteria include: your company is a SME (HMRC definition); your R & D is contained in an identifiable project; and the R & D has costs such as staff and materials.

Can we claim for R & D if we sub-contract to a 3rd party?

You can claim 65% of any costs you’ve paid to a subcontractor (such as The inventions Factory) undertaking R & D qualifying activities. If your company is connected to the subcontractor or any other company then there are likely to be additional accounting steps to calculate the effective R & D costs.

How much R & D tax relief can our company get?

Small to medium businesses (SME) can claim effectively 25% – 33% on qualifying R & D costs depending on the profit/loss position – the current average SME claim is around £60,000.

Another scheme for larger companies, called Research and Development Expenditure Credit (RDEC) gives a less generous tax relief credit of effectively 10.5% on eligible R & D costs.

What is the time limit for R & D tax relief claims?

The deadline for amending Corporation Tax (CT600) is normally 24 months after the end of your company’s 12 month accounting period.

For example, if you file accounts to 31 December each year, for accounting period ended 31 December 2018, you have until 31 December 2020 to submit an R & D tax claim. So from 1 January 2021 you can no longer claim for qualifying R & D activities between 1 January 2018 and 31 December 2018.

Can we claim R & D tax credit for failed projects?

As far as HMRC are concerned R & D is all about taking a risk to overcome scientific or technical uncertainty for R & D tax relief. The successful outcome or commercial utilisation of the R & D is of no interest to HMRC.

Can my company claim if the R & D project isn't finished?

R & D projects do not always fall conveniently in one financial year. You have to make a separate R & D tax credit adjustment for each tax year the project is active and incurring eligible R & D costs.

HMRC allow you to re-state corporation tax via a CT600 for up to 24 months from the end of your company’s accounting period.

What if my company is loss making?

For a company making a loss an R & D claim will increase the taxable loss. This can be carried back, carried forward or surrendered for a cash payment at a rate of 14.5% against the enhanced 230% expenditure under the SME scheme. Hence this can create a credit of up to 33% of the eligible costs.

How do we make an R & D Tax credit claim?

The inventions factory has a referral partner to assist with claims, who compliment the standard services of professional partners including accountants or financial advisers. Following our referral they’ll typically make an introductory call to you. Then arrange to meet and become your single point of contact.

Many of their experienced executives have run businesses themselves and the team have a wide range of industry sector knowledge.

Assuming you wish to proceed, you will be asked to sign an engagement agreement. That’s the first step of 5 easy steps in the tax credit claim process.

After the initial claim, they will stay in touch to ensure you continue to structure your operations to optimise R & D tax relief in subsequent years.