R&D Tax Credits: The Fact Sheet

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Article produced in consultation with Sandy Findlay, Partnership Director at ABGi – GTM Global Partner

R&D tax relief is an industry agnostic incentive scheme: companies from EVERY industry sector can make a claim. As long as they are undertaking projects aimed at advancing the baseline of technology or science, and are using competent professionals in addressing technical uncertainties along the way, they could be eligible for receiving R&D tax relief.

Even though in principle, it sounds simple enough, it’s very important for a business to be able to clearly define the advances they were hoping to achieve, as well as the uncertainties they faced along the way. If they don’t, their claim could be rejected, they could lose thousands in relief, face the inconvenience of an HMRC enquiry or the pain of substantial penalties.

RD-Tax-Relief-Stats_-national_OCT20

What are the benefits?

R&D Tax Relief applies to both profit-making companies paying Corporation Tax and also loss-making companies who are not, both are able to claim for eligible activities.

SMEs in profit can expect to receive up to 25% of their expenditure as relief against current or future tax liabilities. While those in a loss-making position can surrender their losses, and receive up to 33% of their spend as a cash payment.

The scheme is much less attractive for large companies or SMEs having to claim through the RDEC scheme, where qualifying businesses can claim 9.7% of their expenditure as either tax relief or cash credit.

Do you qualify?

So, what is an “uncertainty?” A technical uncertainty is a technical challenge, with

  • no obvious or existing solution (which means you can’t find answers on Google, a scientific paper or on a pre-existing industrial blueprint), and
  • where a competent professional recognises they need to undertake systematic research and investigation to resolve the challenge.

To give you a better understanding of what this means in practice, read a couple of case studies illustrating the types of projects, our partner ABGi UK has helped their clients claim R&D tax relief for in the past.

Based on the above eligibility criteria, what sort of benefits could a qualifying company expect? And what sort of costs can they claim tax relief for?

4 pitfalls to avoid when making an R&D tax relief claim

What is eligible expenditure?

The costs that are eligible for relief are:

  • Staff costs – the majority of innovation is undertaken by people, and as a result the largest element of most companies’ R&D expenditure is the cost of staff involved in and managing these processes.
  • Materials – even though an increasing proportion of early-stage product and technology development is now undertaken virtually through the use of CAD software, there is still a significant role to be played in prototyping to test a design and prove its ability to perform to agreed standards and parameters. In such instances, the cost of materials used in building design models and building prototypes as part of the design process will be eligible for tax relief (so long as the prototypes are not intended to be sold subsequently).
  • Software – any software required to assist in resolving a technical challenge, or in verifying that a challenge has been successfully resolved, or an advance was indeed achieved, will attract relief against the cost of acquisition. Be careful, however, not to claim relief against training staff to use the software! That’s a “No, No” for HMRC, as staff should already be competent in using the software.

Demystifying 5 R&D tax credits myths

If you are finding the above a bit confusing, you are not alone! This is why there is value in speaking to an adviser, who speaks both your language and HMRC’s, who can clearly communicate, on your behalf, the aims of the R&D work you have undertaken and the challenges you have faced in the process, and ensure you receive the biggest return for the least possible effort.

To arrange a free consultation with our partner ABGi UK to discuss your own specific circumstances, to identify how you can improve the claim process and realise greater value for your business, please contact us.

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