What is R&D Tax Relief?

When you think of “Innovative Tax Reliefs”, what’s the first thing that springs to mind? Research and Development Tax Credits (also known as “R&D)? or “no idea!”?

In my experience of the accountancy and tax industry, it is VERY common that R&D Tax relief is missed, overlooked, underclaimed or confused.  So if you are currently feeling confused or don’t know about this relief, fear not. Honestly, tax is not always straight forward or easy to interpret even for qualified Chartered Tax Adviser like me. 

R&D tax relief was introduced by the government to support and incentivise innovation amongst small and medium sized UK businesses.

A company can claim cash payments of up to 33% of the costs incurred on activities that are considered eligible and these funds can be used for any purpose including the payment of dividends! 

All businesses are potentially eligible to claim the relief, provided funds have been spent on developing new or existing products, processes and other technologies.

To make a claim, a business must:

Make considerable improvement to existing technology

This does not always mean it is ground-breaking or innovative work. If a business is working to make their product, services, or processes, faster, less expensive, or better in some way, then this may be eligible for R&D tax relief.

Overcome technical challenges

Especially where the solution is not immediately obvious to a qualified professional.

The time limit for making a claim is 2 years AFTER the end of the accounting year in which you incurred the costs on R&D activities.

Large companies may claim but the relief they can claim is slightly different to small and medium sized businesses – see more below.

A client can claim funds spent on the following items as long as the expenditure was incurred as part of the R&D activities:

1. Staff salaries (including bonuses, employers Class 1 NICs, pension contributions and reimbursed expenses but not taxable benefits or dividends)

2. Utilities, i.e. electricity, gas, water

3. Materials consumed, “transformed” or wasted in the R&D process, e.g. chemicals, raw materials, batteries, component parts, etc

4. Agency workers involved in the R&D project

5. Subcontractor costs, i.e. work that you contract out to another party that forms part of the overall R&D project

6. Prototype development costs

7. Computer software used directly in the R&D activities

8. Tooling developed specifically for use in the R&D activities

Here is an example:

If a company has made a profit then the R&D claim will reduce the amount of profits on which they pay tax. The effect of the claim is to reduce their Corporation Tax liability by 26p for every £1 which they spend on R&D activities.

If a company has made a loss then HMRC will make a cash payment to them of up to 33.35p for every £1 spent on R&D activities.

It may be the case that a company is making profits prior to the R&D claim but following the application of the tax relief they sustain a loss from a tax perspective. In these circumstances, the amount of R&D benefit received by the company will sit somewhere between the ranges set out above depending on your client’s specific circumstances.

If you have a client who you think may be able to make a claim for the relief or want to find out more, book a call.