Quite simply, a research and development tax credit is a corporation tax rebate/refund due on any work which is considered to be seen as research and/or development for new products or processes.
Do you qualify?
Often when a business owner sees the words R & D they automatically assume this scheme isn't for them. In reality though you would be amazed at how many companies are carrying out work which would qualify for R&D tax credits. They just don’t realise it!
To begin with you need to be a Ltd company and its best if you are a small business since the reliefs are much more generous. Apart from these there are very few restrictions on which type of businesses apply.
The main condition for qualification is that you must be attempting to overcome scientific or technological uncertainties to achieve advances which will benefit your industry as a whole. What the hell does that mean? I hear you mutter!! Well there are many projects that we’ve worked on so I thought I could share a couple to give you an example of eligible projects;
- A coatings specialist who is working on different types of paint and additives to achieve a new and unique finishing effect
- A laboratory developing a new screening process for medical applications
- An audio technology company developing and improving Digital signal processing for sound systems.
- A marine engineering company developing bespoke products for under seas exploration.
- A haulage company who has commissioned a specialist to design and produce bespoke aerodynamic aids to increase fuel efficiency on their haulage fleet.
- A design and creative company who has created in house software to increase the efficiency of its workshop
In order to determine whether your company qualifies for R&D tax credits you should ask the following 5 key questions:
- What is the purpose and aim of the R & D Project? (What were you trying to achieve?)
- What were the scientific or technological uncertainties involved in the project (problems and risks)?
- How and when were the uncertainties actually overcome? (methods, investigations, analysis)
- Why was the knowledge being sought not readily deducible by a competent professional?
- How does this R & D Project benefit the industry as a whole?
What can we claim for?
The main costs a company can claim for are; relevant R&D staff costs, Materials costs of items used in the R&D, Subcontractors costs and Utilities such as Light, heat, power and water
How much would we save?
At current rates if you are spending £100 on R&D you will normally obtain a £125 additional reduction on your taxable profit. At 20% CT rates this is worth an additional £25 tax relief on every £100 spent on R&D.
If you don't have a corporation tax bill you can still claim refunds from HMRC in the form of payable tax credits. These are currently payable at the rate of £13.75 for each £100 spent on R&D. Have I baffled you yet, well here’s an example to help you understand fully;
Ltd company that spends £100,000 on R&D and has taxable profits of £125,000 will be able to reduce their tax bill from £25,000 to NIL by making an R&D claim. This is because the R&D costs will provide additional corporation tax relief of £125,000.
New taxable profit is now £0 (Net Profit of £125,000 minus R&D relief of £125,000)
Furthermore, if the company was not yet profit making the £100,000 expenditure would allow it to claim a £13,750 refund in tax credits from HMRC by submitting a claim.
Is there a catch?
We don't really see one at the moment. Unlike other tax saving schemes which are undergoing high profile attack from HMRC with many being shut down; R&D tax credits are actually being encouraged by the government.
Over the last few years reliefs have progressively become more generous and restrictions have been reduced.
Why this apparent kindness? Well it seems that both this government and the previous one, see R&D as crucial to the success of UK plc. This is justified given the decline in manufacturing brought about by low cost competitors in Asia. The only feasible way for Britain to obtain an edge over these competitors is through innovation, which is at the very heart of research and development.
There is no guarantee of how long this will last but the above evidence suggests that R&D tax credit relief will be around for at least the foreseeable future.
What should I do now?
As a business owner/manager, answer the 5 questions above to determine if there is scope for an R&D claim in your business. If there is potential then feel free to give us a call for a no obligation review or your situation by our experts.
Do it today - you have nothing to lose and potentially a lot of tax relief to gain!
Want to know more about R&D? Check out our quick guide to R&D