(Updated: July 2019) So you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?
HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.
There are 4 key steps to making a successful claim for UK R&D tax credits:
1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes
Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.
Consider which projects you feel pushed the boundaries of knowledge or capability in your field (not just for you as a company).
For example, you may have found yourself at point A in a new project and wanted to get to point B in terms of say, a new or improved product or service but had no idea how to get there? You therefore incurred time and costs engaging competent professionals in your sector seeking to find potential solutions.
You may have hit roadblocks along the way and therefore incurred commercial and financial risk.
Don’t forget that aborted projects can also be included in a claim.
If so, these can all be pointers towards potentially qualifying R&D activities for tax…
You should aim to build your supporting R&D report around four key headings:
- What is the science or technological advance sought?
- What were the scientific or technological uncertainties involved in the project i.e. why was it that standard or commonly accepted approaches or methodologies wouldn’t work in your case?
- How and when were the uncertainties actually overcome? Take us on your development journey. What worked and what didn’t?
- Why was the knowledge being sought not readily deducible by a competent professional in your field? It helps here if you can provide a little info on the background and experience of the team that you had involved in this project.
There are specific HMRC guidelines for claims made by companies in the field of software development including some example case-studies of qualifying projects for R&D tax purposes.
HMRC deals with R&D tax credit claims via its specialist R&D Units.
2. Quantify your R&D tax qualifying costs
Qualifying costs for R&D tax purposes fall within 3 main categories:
(i) Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs).
Make a table (say in excel) listing all of the staff engaged in the R&D project(s) and their total emoluments for the year. Then apply a percentage based on the number of days that they were directly engaged in the R&D project work (v their total working days).
Ideally your team maintain time-sheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.
(ii) Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by a staff provider e.g. agency, in the latter case.
These relationships can sometimes be quite tricky to classify for R&D tax credits purposes and the paperwork will often be key.
(iii) Software / Consumables can also be included in a claim.
These will typically be off-the-shelf software that you had to buy to use within the R&D process (e.g. software licences).
Or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded.
Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme (if not already securing 100% writing down allowances under the normal Annual Investment Allowance available to all companies).
A percentage of your power and water costs can also be claimed.
The total of the above costs will form the basis for your claim.
3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.
The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the SME thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).
From 1 April 2015, the enhancement is 230% on qualifying costs.
So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2019 are £150,000, then under this R&D tax incentive you will receive an additional £195,000 deduction against your taxable profits for the year. This is for company corporation tax purposes only i.e. it is a ‘notional’ tax deduction only that does not reduce your profits for accounts purposes.
This means that you have less profits subject to corporation tax so it reduces your bill.
Taking this a step further, say your adjusted taxable profits (but pre-R&D enhanced deduction) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £23,750 into a tax loss of £70,000. Not only does this eliminate the c£24k tax bill, but it potentially results in a tax credit rebate of £10,150 from HMRC (at 14.5%)!
Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!
You can go back to accounting periods ended in the past two years to make or amend claims – so its not too late to revisit and amend previously filed corporation tax returns.
4. How to file the R&D tax credits claim with HMRC
The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your R&D report and accompanying calculations can be filed online via the HMRC filing portal. They will be passed internally to the relevant HMRC R&D Unit for processing.
HMRC aims to process all R&D tax credit claims within 28 days of filing.
Getting the best R&D tax result for you
There is more work to be done before your R&D tax claim is filed with HMRC. This work is to determine the optimum treatment of the claim for your specific circumstances.
For example, rather than reclaim the cash tax credit at 14.5%, it may work out better for you to carry a resulting loss back to the previous profitable accounting period. Or carry forward to future periods if you expect to return to profitability quickly.
This is because the net cash recovery might be higher than simply claiming the in year tax credit.
You can attempt to make a claim yourself or you could try using HMRC’s new R&D pilot programme although you may find you achieve a better result by seeking some professional help from R&D tax credits specialists.
Either way, I hope that the above is helpful and we see more R&D claims being filed by UK companies!
You can find a more detailed R&D Tax Credit Guide at our sister site: IP Tax Solutions.