R&D tax credits provide valuable support for companies that are investing in research and development as a way of developing their business.
Forming a part of the UK government’s business strategy, R&D tax credits have now been around for a number of years and are forecast to continue indefinitely.
Any UK based company can claim R&D tax credits based on some fairly simple rules and
- What types of R&D tax credits are there?
- R&D tax credits – the rules
- CBILS and R&D tax credits
- How to claim R&D tax credits
- How to get your R&D cash quickly
What types of R&D tax credits are there?
There are two types of R&D tax credits that are aimed at different sizes of companies.
The first is the Small and Medium-sized Enterprises (SME) R&D Relief. This is the most generous version of R&D tax credits available for UK companies and is a way of rewarding smaller companies that carry out R&D and helping them to reinvest cash.
The SME scheme provides a choice of two benefits.
The first option is a straightforward credit against future tax bills. This amounts to 230% of the value of the R&D expenditure which for many companies can completely wipe out any tax liability for the year.
The second benefit is a cash payment of 14.5% of the value of expenditure. This is helpful as many companies that are carrying out research may not have a product that is available to market and hence no profit and so this certainly helps with cash flow.
For larger companies, the Research and Development Expenditure Credit (RDEC) provides a tax credit of 13% of qualifying expenditure to set against their corporation tax bill.
The cut-off point for qualifying for SME R&D relief is when a company has
- More than 500 staff
- A total turnover of over €100m or a balance sheet total over €86m.
R&D tax credits – the rules
As you would expect with a tax credit scheme there are rules that you need to abide by before you can claim.
Companies are only allowed to claim eligible costs.
These fall into 8 categories;
- Direct Staff costs – internal staff members and people who directly work on the project itself including on-costs like NICs and pensions.
- Externally provided workers – contractors and external experts that the company pays for
- Subcontracted R&D – parts of the project that are subcontracted out but that are paid for by the company
- R&D consumables – general consumables that are used up in the process of carrying out the research
- Software – software required to run the project or for the use of direct staff and contractors.
- Clinical trial volunteers – expenses payments made to people who test during trials of eligible projects
- Contributions to independent research – where the company funds independent research into aspects of the project or that would directly benefit the project
- Prototypes – the cost of producing early versions of products
Note though that you can allocate costs to eligible projects. For example, imagine you buy 100 boxes of latex gloves. Half are used by the company and half are used specifically by R&D staff. In this case, the company could allocate 50% of the cost to the project.
We’ve mentioned eligible projects here and it is worth visiting the rules for qualifying projects.
To be eligible for R&D credits of any type the company has to be subject to UK corporation tax and the project must be;
- Seeking a technical or scientific advance
- Subject to uncertainty regarding success
- Something that would be commercially viable
- Be overseen by experts in the field
- Have overcome significant obstacles
Be aware though that the project does not have to ultimately be successful, result in a project that comes to market or be profitable.
R&D tax credits are available for development work that was aiming to be successful and profitable but if the challenges proved insurmountable or indeed a competitor got there first then the credits are still available.
It is also important to note that although the aim is to encourage companies to research specific products that are aimed to make money, that doesn’t mean that ‘blue sky thinking’ is necessarily out of scope.
CBILS and R&D tax credits
Many businesses took advantage of the UK Government’s business support packages during the pandemic and CBILs and the corresponding Bounce Back Loan Scheme were brought in very early on as part of the response to the pandemic.
Unfortunately, CBILs are classed as Notified State Aid and this could end up causing problems for businesses that want to claim R&D tax credits at a later date.
Under the UK’s Corporation Tax Act 2009, an R&D project may only have one source of state aid and this means that companies may be forced to choose between supporting a project using a CBIL and foregoing a later tax credit claim.
So please be aware that you may not be able to claim if you already have a form of state aid such as CBILs or grants.
How to claim R&D tax credits
If you have a project that you think may be eligible then you have a few steps to take.
- Select your project(s) – you aren’t confined to only making one claim a year, so you can split a large project down into smaller ones. This is helpful if part of your work in non-qualifying
- Work out when your project starts and ends – some projects are discrete, some last for years so you may want to split them down into separate phases.
- Choose your scheme – if you are an SME you can choose to apply for either. Larger companies must go for RDEC.
- Collect your costs – you’ll need to have clear and complete accounts for the money you spend on your project otherwise your claim might be rejected
- Write your technical narrative – a clear description of the work you did, the aims, uncertainties and how you overcame them
- Complete your CT600 with the R&D pages. – you can claim up to two years after the end of the project
- File your claim and document – make sure you keep all of the information about your claim in case there are any HMRC questions.
That all sounds pretty simple and it is true that companies can do this on their own but you stand a much better chance of success if you use the services of an R&D specialist.
We have a network of professionals in all sectors who will be able to help so contact us and we’ll be happy to put you in touch.
How to get your R&D cash quickly
You may have noticed that step number 6 is to complete your claim on your CT600 – or Corporation Tax self-assessment return.
This means that you can’t start your claim until the end of your tax year at the very earliest and given that you have nine months after the end of your reporting year to submit your return you could be waiting a while for your money!
That’s where we come in.
We’ve developed a unique funding product that gives companies the option of getting their R&D cash fast with no requirement to pay back the capital until the claim is settled.
This means that you can give your cash flow a boost without having to wait for HMRC to do their thing!Call us now and we’ll explain exactly how it works and how to apply.
Summary: claim your R&D tax credits now
Tax credits are a valuable resource for companies that are carrying out research and development and for SMEs they can be very generous indeed.
Admittedly it does take an amount of organisation and it may be that you don’t have the resources or skills in-house to do this, so we’d suggest looking at using a specialist in the field.
But once you have a valid claim in place it can be worth up to 230% of your eligible spend, so is definitely worth doing.
And using our unique R&D tax credit finance product you can get access to your cash super-quick, allowing you to reinvest in more research along the way.
If you’d like us to refer you to an R&D tax credit specialist or you want to talk about financing your claim, call us now and we’ll be glad to help.