5 Things About R&D Tax Relief you Didn’t Know
In the business context, R&D represents the pursuit of innovation. An ever present concept that is prioritised across the globe, the UK incentivises innovation in business with the R&D Tax Relief scheme. This blog explains everything you need to know.
Launched in 2000, the R&D scheme allows your company to claim back 30% of the money spent on research and product development. Despite being an exciting and lucrative resource, there are still areas that startups struggle with.
The scheme allows your company to invest in R&D activities, hire technical staff, and ultimately grow your business without worrying about the extra costs. R&D doesn’t necessarily involve creating new products, processes, or services, as even the modifications and changes in the existing products, processes, and services can be counted as R&D.
If your startup has successfully secured the initial funding, investing heavily in R&D is a great way to make it to the subsequent funding rounds. Although the number of companies filing for the scheme has constantly been growing, thousands of eligible companies are unaware of this benefit.
Today, we're shedding light on 5 of the biggest missed facts about R&D that you need to know about.
1. two types of R&D tax relief are available
The SME R&D Tax Credits Scheme is available for businesses with a turnover of less than €100 million and less than €86 million gross assets in the balance sheet. Also, your company needs fewer than 500 staff to qualify as a small to medium sized entity (SME). Apart from the normal 100% deduction available for small and medium-sized enterprises, SME R&D relief also allows companies to deduct an extra 130% of their qualifying costs from their yearly profit.
If your company makes a loss, you can claim a tax credit worth up to 14.5% of the surrenderable loss. Companies that do not meet an SME's criteria can claim a Research and Development Expenditure Credit (RDEC) which amounts to 13% of your qualifying R&D expenditure from 1 April 2020.
2. R&D tax credits can be claimed regardless of a project’s success
You might wonder why the UK government is passionate about helping innovative companies. Well, because the benefits of innovation are wide reaching. The advancements in products and services ultimately lead to increased productivity, and the effects of this productivity are good for the UK and help boost the economy. Beyond just the UK, innovation can bring about positive change on a global scale by producing better products and solutions.
An R&D project is considered finished when the uncertain elements have been overcome. Any commercial activities and user testing afterwards will not be a part of research and development.
The HMRC acknowledges that the research and development cycle is inherently risky as the outcomes are uncertain. Especially for startups, it is the earliest stage of developing new products or services. For fully operational businesses, R&D activities are crucial to keeping up with the competition. Otherwise, the customers will move on to new products or services that provide better value for money or have better quality.
Research and development are more important in some industries as opposed to others. For instance, companies in IT, telecommunications, pharmaceuticals, and life sciences rely heavily on constant research and development. You can claim R&D tax relief regardless of whether your project was a success or a commercial failure.
Even if the project is halted midway, the eligible costs on this project are still likely to qualify for R&D relief. HMRC mainly looks out for the challenges and uncertainties you face in your R&D journey instead of how profitable the project was. These R&D activities may include A/B testing, pivoting and experimenting, etc. This relief allows the companies to afford the costs involved in research, thus de risk the development for companies.
3. R&D tax credits aren't limited to one sector
R&D is an integral part of any company, regardless of size or sector. Usually, the term R&D is mostly associated with laboratories or tech companies. Luckily, the UK government’s definition of R&D is purposefully broad and covers many sectors. Even the projects undertaken for a client can be considered R&D projects.
As long as your company is working towards ‘resolving scientific or technological uncertainties,’ you are carrying out an activity that successfully qualifies for the R&D tax credit. It may involve software development or even food production technology.
R&D activities are not performed with the expectation of immediate profit. Instead, you carry out these activities hoping for innovation and advancements that may bring long-term profitability. R&D mainly explores designs and tests new ideas, products, or services. Ideally, you should take a risk by seeking to advance in the field of science or technology. The routine copying of existing products, processes, and services may not qualify as R&D. Any work to improve a product's cosmetic or aesthetic qualities will also not be considered R&D.
4. You can claim costs of foreign subcontractors
At first instance, it may seem like the R&D tax benefit only covers costs purely related to scientific research activities. But, you may include more costs than you think. You should make sure to include all the relevant costs while filing your tax relief.
These include staffing costs, costs of subcontractors, associated staff costs, and the materials used in the research. Once these elements come together, you'll realise that the overall size of the claim is much bigger than you were expecting. Remember, the capital expenditures and costs for producing and distributing goods and services don't qualify under this scheme.
Thanks to the HMRC R&D tax benefit, you can claim tax relief of up to 65% of the costs of subcontractors. It doesn’t matter if these subcontractors are not based in the UK or if your R&D activities are being performed abroad.
This benefit allows startups to choose the most ideal subcontractors or freelancers for themselves without worrying about whether they are based in the UK.
Are you a startup searching for how R&D can help you build a solid business foundation?
5. R&D tax claim processing only takes 28 days
While it may seem like a complex process at first instance, it takes less than 28 days for the HMRC to process and pay the R&D tax claims. It's best to use the services of a qualified chartered accountant or online accounting services to file a claim. They may charge a small percentage of the total value of the claim, but they'll help you identify the eligible costs often missed by in house accountants.
This report makes it easier for the HMRC to identify the eligible expenditure being claimed on a project. It also justifies the underlying technical uncertainties of the project. Based on the size of your company, you may choose one of the following two schemes for R&D tax relief.
The SME R&D Tax Credits Scheme
The RDEC (Research and Development Expenditure Credit)
HMRC has a whole department dedicated to R&D tax credits. This is one of the reasons why your claim could be with you sooner than you think. If you’re well versed in the processes of claiming an R&D tax credit, you can quickly get a hold of the financial benefits.
R&D tax credits can be claimed as either as a cash payment or a corporate tax reduction. Luckily, the scope of identifying R&D exists in every single sector. If you file the claim for the first time, you can claim R&D tax relief for the last two completed accounting periods.
The take away
HMRC’s R&D Tax Relief is an excellent incentive for your business to focus on innovation and advancements. You may receive it in cash payment from HMRC or as a deduction from your corporation tax.
Here at Accountancy Cloud, we’re dedicated to helping startups with their accounting and taxation needs. Get expert advice and make the most out of the R&D Tax Relief benefits. Click here to get in touch!