What is R&D tax relief?
In the year 2000, the UK government considering the significant contribution of businesses in the fields of research and technology took an initiative to reward them by introducing R&D tax relief. All the UK-based companies which are investing in research and development by introducing new products and services are eligible to apply for R&D tax relief. R&D tax relief is a corporation tax relief that significantly reduces a company’s tax bills, and can be claimed by the company that is liable to Corporation Tax. It allows you to claim an enhanced deduction against their profit, staff count, and subcontracted services. It substantially reduces tax liabilities and provides tax repayment of the paid tax.
Who is eligible to apply?
All the SME’s and large companies working for advancement in science and technology, working to overcome uncertainty and filling the knowledge gap are eligible to apply for R&D tax relief. Projects from various sectors like logistics, technology, construction, and manufacturing can apply for it. To meet the criteria of the R&D tax relief claim the project must focus on bringing innovation, contribute to advancement of not only your own business but in the overall field of technology and also put effort to overcome uncertainties. Scientific uncertainty means when a technological expert is unclear about something even after achieving it, so all the analysis and tests you run to remove this uncertainty are included in R&D.
- SME Scheme:
Profitable small and medium-sized companies with less than 500 staff members, turnover limiting to £100 million, and have balance sheet of £86 million are eligible for the SME scheme. SME’s can have their qualifying costs deducted by 130% of their yearly profit and 100% deduction equating to 230% deduction. It reduces net costs of £56 per £100 of expenditure.
Loss-making companies can have 14.5% cash repayment from HMRC, even if they have not paid tax.
- Large companies:
Research and Development Expenditure Credit (RDEC) which is 13% of your R&D expenditures, can be claimed by the large companies which exceed the limits of SME.
How to calculate R&D tax relief?
- Calculation of enhanced expenditure:
You need to calculate your enhanced expenditure for the claim, for that you have to calculate the expenditure directly attributable to R&D. Reduce payments of subcontractors and external staff to 65% of the original and add all the expenditure, then multiply it by 130% to get the deduced figure for further computations. Add the figure in your R&D expenditure and will get enhanced expenditure to enter for your tax return.
How to claim R&D tax relief?
R&D tax relief can be claimed up to 2 years preceding the accounting period. To start the claim process one should enter expenditure details in “Full Company Tax Return Form CT600”.
For the claim you have to explain how your project meets the qualifying criteria of the claim. You have to provide details regarding how your projects are contributing to advancement in science and technology, what new addition have you made to the technology market, what uncertainties you faced and how you tried to overcome them.
You are required to provide the start and end date for the accounting period you are claiming, as given in the form you submitted and also your company’s Unique Tax Reference (UTR) number.
- Assessment and Eligibility:
The claim process starts with the assessment of your project to find how it meets the criteria of the claim to calculate tax refund/relief.
- Gathering Information:
Information regarding all the factors contributing to R&D tax relief is gathered as the time spent on R&D activities accounts for the relief so it is important to look closely at each aspect to maximize tax reduction.
The report is tailored inculcating all the details of tax, accounting period, company’s UTR number, and revised tax computations.
The report along with supporting evidence is submitted to HMRC and within few weeks you will receive tax reduction as per calculations. A claim can cover a year or more but you have to submit a separate claim for each accounting period relating to R&D.
R&D tax relief is legitimate relief to facilitate and encourage innovation in the UK. Companies can also opt for the R&D credit, for loss-making companies it is preferred to claim for the credit so that the business can move on.
It is important to create a report very carefully and meticulously to avoid objection from HMRC to avoid these complexities you can seek advice from an R&D expert. R&D expert will not only guide you thoroughly regarding each step but also help you from the first step to the last so that you can receive maximum tax reduction or credit. For more information contact us.