Are you one of the many UK businesses eligible to claim R&D tax relief or an R&D tax credit, but doesn’t?
Often business owners assume that they would not qualify when in fact the opposite is true – the definition of “R & D” for tax relief purposes is wider than many think. By failing to submit a claim you might have lost out on the significant benefits that the scheme offers in terms of improved cash flow and reduced corporation tax.
Overview of R&D Tax Relief Scheme for Small Companies
- Reduces Corporation Tax: R&D tax relief reduces taxable profits (or increase taxable losses)
- Cash Payment: Where there are taxable losses or refunds due, the R&D tax relief may be converted to an immediate cash payment from HMRC (tax credit)
- Retrospective: Claims may be made for up to two previous tax years as well as the current year
- Ongoing: Claims may be made every year “qualifying R&D” activity takes place
- R&D Tax Relief is a well-established HMRC scheme, running since 2001
- R&D Tax Relief is claimed as part of the normal Corporation Tax self-assessment process, with the addition of “Technical Justification” and costs documents describing the R&D activities undertaken
- The scheme has been significantly improved in recent years, making it more attractive, e.g:
~ removal of a cap on the value of claims based on NI/PAYE payments made by the company
~ substantial increases in the value of tax credits relative to expenditure (now up to 33.35%)
~ removal of any requirement for ownership of intellectual property (e.g. patents)
~ wider eligibility of medium-sized companies for the small companies scheme
These changes mean that many smaller businesses that have not claimed in the past it would now find it worth claiming.
Eligibility for the SME scheme
- The company must be a going concern and potentially liable for Corporation Tax
- Small or medium-sized organisations must employ fewer than 500 employees and, either have a turnover of less than €100 million (~£83 million) or a balance sheet of less than €86 million (~£70 million). These rules apply to group organisations as a whole.
- R&D projects must have been undertaken which seek to resolve scientific or technological uncertainty. New product developments often involve qualifying research or development, as do projects resolving product problems, or in integrating suppliers’ technical components into products. Often, companies have qualifying R&D activities that they had thought wouldn’t qualify.
- The specific R&D projects must NOT have received public money (but see “R&D and Grants” sheet)
- Eligible costs include: management and staffing costs, consumed materials, power, water, certain “subcontractor” arrangements, software, and certain indirect costs, e.g. admin, payroll…
Example Financial Benefits – R&D Tax Relief Claims (expenditure 2015-16)
1/ Assume normal taxable profit is £200k after counting R&D expenditure (£150k). R&D relief is 230%, i.e. another 130% x £150k, so revised taxable profit is £200k-£195k=£5k, thereby reducing corporation tax by 20% (corporation tax rate) x £195k = £39k.
2/ Or say, normal taxable loss is £150k, and R&D expenditure=£150k, R&D relief is 230%, i.e. another 130% x £150k, so extra taxable loss is £195k to offset against future years (worth £39k of extra corporation tax savings later), or if preferred, a cash payment (“R&D tax credit”) of £50k.
How we help
- We prepare the Technical Justification document, help you identify costs and work with your auditor/tax accountant to submit, and, if necessary, persuade HMRC to accept, the claim.
- We typically prepare claims for three years (and if applicable the 2 previous years). Our charge is 18% of the total tax saving / tax credit, with a minimum fee totalling £2,000 over the three years’ claims. No extra costs, no win, no fee.
To find out more please call us on 0845 251 4040 / 07789 638 178 or email: firstname.lastname@example.org