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General Information
What are R&D Tax Credits?
R&D Tax Credits are government incentives designed to encourage innovation by providing tax relief for companies investing in research and development. These credits can significantly reduce a company’s tax liability or, for loss-making companies, provide a cash payment.
Who administers R&D Tax Credits in the UK?
HM Revenue and Customs (HMRC) administers R&D Tax Credits in the UK. HMRC sets the guidelines, processes claims, and ensures compliance with the rules.
Why were R&D Tax Credits introduced?
They were introduced to stimulate investment in innovation, making the UK a competitive environment for technological and scientific development. The goal is to support companies that undertake R&D activities, fostering advancements in science and technology.
Eligibility
Who can claim R&D Tax Credits?
UK-based Limited or PLC companies undertaking qualifying R&D projects can claim these credits. This includes companies of all sizes and across various industries, provided they meet the criteria set out by HMRC.
What qualifies as an R&D project?
Projects that involve technological or scientific advancements aiming to resolve uncertainties qualify as R&D. The work must be part of a specific project to make an advance in science or technology, not just routine development.
Can start-ups claim R&D Tax Credits?
Yes, start-ups can claim R&D Tax Credits if they meet the eligibility criteria. This can be especially beneficial for start-ups needing additional cash flow to fuel their innovative projects.
Do we need to have a profitable business to claim?
No, even loss-making companies can claim R&D Tax Credits and receive a cash credit, which can be crucial for maintaining cash flow and continuing R&D activities.
Can non-technical industries claim R&D Tax Credits?
Yes, any UK-registered company in any sector can apply if they meet HMRC’s requirements for qualifying R&D costs. This includes industries such as construction, online retail, and agriculture.
Qualifying Activities and Costs
What activities count as R&D?
Activities aimed at creating new products, services, or processes, or improving existing ones qualify as R&D. The key is that these activities must involve overcoming scientific or technological uncertainties.
What costs can be claimed under R&D Tax Credits?
Eligible costs include:
• Staff costs: Salaries, wages, and other related expenses for employees directly involved in R&D.
• Consumables: Materials and supplies used up or transformed during the R&D process.
• Software: Software licences directly used in R&D activities and could computing costs that can be attributed to computation, data processing and software.
• Subcontractor costs: Payments to subcontractors engaged in R&D activities on behalf of the company (usually at 65% of the cost).
• Externally Provided Workers (EPWs): Costs for workers provided by an external agency if they are directly involved in R&D.
• Utilities: A proportion of power, water, and fuel costs used in the R&D process.
What makes up staff costs for the purposes of a claim?
For staff working directly on the R&D project, you can claim a proportion of their:
• Salaries
• Wages
• Class 1 National Insurance contributions
• Pension fund contributions
You can also claim for administrative or support staff who work to directly support a project (for example, specialist cleaning staff). But you can’t claim for clerical or maintenance work that would have been done anyway, such as managing payroll.
What costs cannot be claimed?
The company cannot claim for:
• the production and distribution of goods and services
• capital expenditure
• the cost of land
• the cost of patents and trademarks
• rent or rates
Are marketing expenses included?
No, marketing expenses are not eligible for R&D Tax Credits. The scheme only covers costs directly associated with the R&D activities.
Can costs for failed projects be claimed?
Yes, HMRC’s definition of R&D includes projects that do not succeed. The purpose of the project must be to make a scientific or technological advance, regardless of its outcome.
Financial Impact
How much can a company claim?
The amount a company can claim varies based on business size and profit status and R&D intensity.
Is there a limit on the amount that can be claimed?
There is no upper limit on the amount that can be claimed for SMEs, but large companies under the RDEC scheme have specific caps related to their PAYE and NIC liabilities.
How does claiming affect a company’s tax liability?
R&D Tax Credits can reduce a company’s corporation tax bill or, for loss-making companies, provide a cash payment. This can significantly improve a company’s cash flow and financial stability.
Claim Process
What is the process for claiming R&D Tax Credits?
The process involves several steps:
1. Identify eligible projects: Determine which projects qualify as R&D under HMRC’s guidelines.
2. Calculate qualifying expenditure: Identify and calculate the costs directly associated with the R&D projects.
3. Compile a technical report: Prepare a report detailing the R&D activities and the scientific or technological advancements sought.
4. Submit a claim: Include the R&D claim in the company’s tax return, providing detailed financial records and the technical report.
How long does it take to receive the credits?
Claims are typically processed within 6-8 weeks after submission to HMRC. However, this can vary depending on the complexity of the claim and HMRC’s workload.
What documentation is needed to support a claim?
Detailed financial records, project descriptions, and technical reports are required. Companies must keep thorough documentation of their R&D activities to support their claims.
Working with Specialists
Why should a company use an R&D Tax Credits specialist?
Specialists can help maximise claims, ensure compliance, and handle the complex documentation and submission process. They are experienced in identifying qualifying activities and costs and can navigate HMRC’s requirements effectively.
How can Fixed Price R&D assist in the process?
Fixed Price R&D provides expert advice, helps identify all qualifying activities and costs, and prepares and submits the claim on behalf of the company. Their expertise can ensure that the claim is maximised and compliant with HMRC’s guidelines.
Compliance and Risks
What happens if HMRC questions a claim?
If HMRC questions a claim, they may request further information or an audit. It’s essential to have thorough documentation. Companies should be prepared to explain and justify their R&D activities and related expenditures.
Are there penalties for incorrect claims?
Yes, incorrect claims can result in penalties and repayment of the credits with interest. Ensuring accuracy and compliance with HMRC’s guidelines is crucial to avoid these penalties.
How can companies avoid compliance issues?
Maintaining accurate records, working with specialists, and understanding the guidelines can help avoid compliance issues. Regular reviews and audits of R&D activities and expenses are also recommended.
Scheme Changes (Effective April 1, 2024)
What changes are happening to the R&D Tax Credit scheme?
From April 1, 2024, a new merged scheme will apply to all companies undertaking qualifying R&D. This scheme aims to simplify the R&D tax relief process and make it more accessible.
How does the new scheme differ for SMEs?
The new SME Intensive scheme is for companies with fewer than 500 staff, a turnover under €100 million, a balance sheet total under €86 million, that made a trading loss before relief, and spent at least 30% of total revenue on R&D.
What is the RDEC scheme?
The Research and Development Expenditure Credit (RDEC) scheme is for large companies and provides a tax credit of 13% of qualifying R&D expenditure. This scheme is also available to SMEs that have been subcontracted to do R&D work by a large company or have received state aid.
Miscellaneous
Can previous years’ expenses be claimed?
Yes, companies can claim R&D Tax Credits for the previous two accounting periods. This allows businesses to benefit from past R&D activities even if they were not previously claimed.
Can R&D Tax Credits be combined with other grants or incentives?
Yes, but the interaction of different incentives can affect the claim value. It’s advisable to consult with a specialist to understand how different grants and incentives impact the R&D tax credit claim.
How can R&D Tax Credits improve a company’s cash flow?
R&D Tax Credits can provide a significant cash injection for loss-making companies or reduce the corporation tax liability for profit-making companies. This improved cash flow can be reinvested into further R&D activities, fostering innovation and growth.
What if my project involves overseas R&D activities?
For accounting periods starting on or after 1 April 2024, subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work done in the UK. However, there are exemptions for activities that require specific conditions not available in the UK, such as deep-ocean research or clinical trials.
How does the company size affect the scheme under which we claim?
Companies with fewer than 500 staff and a turnover under €100 million or a balance sheet total under €86 million can claim through the SME scheme. Companies exceeding these limits should claim using the RDEC scheme.
What if my company is part of a larger group?
If a larger business owns your SME, you may need to claim through the RDEC scheme. The classification as a partner or linked enterprise will determine this, depending on the ownership percentage and control.
Can grants affect my R&D Tax Credit claim?
Yes, if your grant counts as ‘notified state aid,’ you may need to claim it entirely or partly through the RDEC scheme. The interaction between grants and R&D tax credits can be complex, so it’s advisable to consult with a specialist.