A Simple Guide to Research and Development Tax Relief
Research And Development (R&D) Tax Relief
One of the key features of the proposed corporation tax reforms is to create a more favourable tax regime for expenditure on innovation and intellectual property. The government has been consulting on the future of the research and development tax system. The current system of R&D tax credits is quite generous up to a point but the consultation will look at extending tax breaks further into the life-cycle of innovative products.
Research And Development (R&D) Tax Regime
R&D Tax Credits are a UK tax incentive designed to encourage companies to invest in R&D. Companies can reduce their tax bill or claim payable tax rebate as a proportion of their R&D expenditure.
When defining an R&D project there are specific criteria to meet:
- R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
- The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
- Certain qualifying activities related to the project are also R&D, they have to be directly linked to overcoming the scientific or technological uncertainty/technological advance .
- The solution cannot be readily deducible by a competent professional in the field
Related to the trade
There is a requirement that the R&D carried on by the company is either related a trade carried on by the company or from which it is intended that such a trade will be derived. R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade and medical research that has a special relation to the welfare of workers employed in that trade.
There are two schemes for claiming relief, depending of the size of the company:
- The Small or Medium-sized Enterprise (SME) Scheme
- The Large Company Scheme
If the company and the project meet the necessary conditions, then tax relief can be claimed on the following items of revenue expenditure:
- Staff Costs – This means the cost of employing staff directly who are actively engaged in carrying out R&D itself.
- Externally provided workers and sub-contractors – This covers the cost of paying a staff provider for staff provided to the company, or a sub-contractor who are directly and actively engaged in carrying out R&D.
- Consumable Items – These include consumable or transformable materials used directly in carrying out R&D.
- Software - Revenue expenditure incurred on computer software employed directly in R&D.
How do R&D Tax Credits work?
R&D Tax Credits work by reducing your taxable profit and thereby decreasing your Corporation Tax. However, the scheme is designed to help companies even if they are in profit or not, so if you owe a small amount of Corporation Tax or even none, the scheme can still provide you with cash in exchange for surrendering some of the tax loss that has been created.
Usually amounts ranging from 25-33% of the R&D costs can by earned in the last two completed financial years which for loss-making companies can prove to be an extra month or two of runway.
Here's a very quick set of guidelines for tech-based businesses
- Rule of thumb: If a competent engineer would look into an issue and would not know exactly how to solve the problem and would need look into, it's likely to qualify
WILL NOT QUALIFY:
- UI developments (unlikely to be a game changer)
- Frontend code, visual presentation of data
- Technology built to replace manual processes
- Technology built to make the experience more sleek or to remove frictions
- Routine data operations including data rendering, manipulation or presentation
- Solving business problems by implementing existing technology
- Creation of a new data search system
- New and more efficient algorithms to analyse the data input
- New security and data privacy protection techniques
- Building API to get 2 systems talk to each other that was not done before (e.g. paypal & xero automated reconciliation)
- Resolving conflicts between hardware and software
- Solving a problem with a previously untried technique
- Building new technology to improve business efficiency (e.g. using user data to create demand-based algorithms to predict likelihood of a product to sell well based on user feedback)
And, set up the correct framework for the R&D claim
- What was the outline of the project(s)?
- Details of the scientific or technological advance(s) sought?
- Why would a competent professional in the field consider this to be an advance - how does it exceed current knowledge?
- Details of the research carried out?
- Were the advances achieved?
- What scientific or technological uncertainties was resolved/attempted to be resolved by the project?
- What were the activities carried our in order to overcome the uncertainties?
The "project" here is either the whole development if you think the whole thing qualifies for R&D; or if there are little parts of the whole project that required technological advance and other parts that did not, then "project" for the purposes of the above table is each little part of the wider project that required technological advances to be made. If you would like to learn more about how to make a claim, please visit our R&D Tax Credits service page. If you would like more in-depth advice and information, download our free full guide to R&D Tax Credits.