The UK Governments Research and Development Tax Relief Scheme (R&D tax credit) has been running for many years to reward and encourage innovative companies, the purpose being to stimulate innovation and growth in the UK economy. 

The scheme is applicable to any UK company (not a partnership or sole trader unfortunately) seeking to improve or develop new products, processes or services whether they be manufacturers, software developers, in Biotech, ice cream suppliers or almost anything in between – there are no industry or sector specific qualification criteria other than as stated by HMRC it must make or be intending to make an “advance in science or technology” however “It can’t be an advance within a social science like economics or a theoretical field like pure maths”.

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The scheme works by reducing a company’s corporation tax by the claim amount (which includes expenditure attributed to R&D plus an enhancement of 30%) in addition to the company’s Profit and Loss position.  This can sometimes bring the bill down to zero or it may mean your company makes a ‘loss’ for tax purposes.  If your company is making a loss you can probably claim a cash payment back from HMRC, even if your company has never made a profit!  This is a huge boost for eligible new companies too.

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The downside of the scheme ‘to date’ is that it is poorly understood and many companies don’t recognise that what they are doing qualifies as R&D. Additionally, a good deal of professional advisors such as accountants are also unsure about the requirements, so many potential beneficiaries of the scheme are missing this opportunity. 

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The guidance from HMRC is quite broad and states that the qualifying project “may research or develop a new process, product or service or improve on an existing one” however, it must aim to create an advance in the overall field, not just for your business. This means an advance can’t just be an existing technology that has been used for the first time in your sector. You need to be attempting to do something that is more than just routine work and it must contain a level of technical uncertainty for a competent professional.

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The questions to ask first are:

- Did your project team faced technological uncertainties at the start of the project?

- Did you know from the outset whether a particular technological goal was achievable?

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If you can show that your project goes beyond applying existing technologies and demonstrate that it breaks new ground, by for example having to carry out a significant amount of testing then it is likely you can claim R&D tax credits.

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It is easier to think of the scheme in terms of projects to develop new or improved processes, products or services. Project examples could include: reformulating ice cream to reduce the sugar and fat content and ensure that it still appeals to its target market, creating a new manufacturing process for bi-fold doors, developing new or improved hardware and software control systems for a printing device.  You cannot claim for the use of existing technologies such as developing a new website in WordPress, however if you needed to have specific ‘code’ written to make your website work as needed then this is likely to qualify.

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When claiming for R&D Tax Relief you first have to identify what qualifying activities you have undertaken and how much they have cost you.  A considerable amount of this is likely to be internal labour costs, including a portion of support and management staff time to support those directly involved, this also includes other costs such as pension and NI, not just wages.  However, you can also claim for the relevant portion of your energy, consumables and wasted material or ingredient used up as part of the R&D process. Additionally, it is possible to claim a portion of other relevant costs associated with external organisations such as hiring contractors, agency staff and test facilities.  It is important to note that all the costs being claimed must be revenue expenses incurred during the relevant accounting period.  This can include qualifying capitalised/ amortised intangible assets and possibly depreciation on tangible assets used, however it does not include the cost of purchasing capital equipment.

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When making your first claim you can ‘go back’ and claim for the previous two tax years activity and you do not have to wait until you have an outcome for the work being undertaken - you claim for the effort at the end of each accounting year.

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If you would like more information or a free consultation on whether you are likely to be able to claim R&D Tax relief please fill in the contact form with “R&D Tax” in the subject line or you can email or call us to discuss how we can help you to claim and R&D Tax Relief that may be due to you.

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