R&D tax credits explained – What are they? Is your client’s company eligible?

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The R&D tax credit scheme was launched in 2000 in the UK to encourage innovation by incentivising businesses to invest in scientific and technological research and development. The reward? A substantial corporation tax deduction or cash payment from HMRC, depending on set criteria being met. The idea being to use this cash injection or tax relief to reinvest into further research and development and to grow your company and relevant industry. The more that is invested in R&D, the higher the tax credit – and the cycle continues.

The end goal – greater wealth creation in the UK economy. Which is a win-win for the government, the business owner, the labourer, and everyone in between.

Exactly how do R&D tax credits work?

In a nutshell, companies that are producing new products or are improving any aspect of the business and its operations are eligible for an R&D tax credit. Before you get too excited, HMRC do have stringent criteria as to what projects qualify for R&D Relief¹:

Your client’s company will need evidence that their project;

looked for an advancement in science and technologyhad to overcome uncertainty and tried to overcome this uncertaintycould not be easily worked out by a professional in the fieldconducted the R&D in a systematic and thorough fashion

The above can apply to developing a new product, service or process, or enhance an existing one. And the beauty is that it’s not only limited to laboratories in the science and technology industry but available to all sectors. One caveat though, the product or advancements made must benefit the relevant industry as a whole, and not only your client’s business.

The element of risk is an important one to consider too. Did your client know what the outcome was going to be? Is there an element of uncertainty or risk associated with the project? And has your client attempted to overcome that risk? And most importantly, do they have the necessary evidence? Your claim will very swiftly be kicked out if you lack the supporting documentation to prove the expenses associated with the relevant research and development.

Is your client’s company eligible for R&D tax credit?

If your client is eligible, they can reclaim up to 33% of their R&D costs! And if it’s their first claim, you can claim for the last two accounting periods.

The actual benefit they could receive depends on whether your client is a large or small company and whether it is profitable or made a loss.

Small businesses (SME’s) can claim research and development tax credit if the company has²:

less than 500 staffa turnover of under €100m or a balance sheet total under €86m

However, if their company has received any grants or subsidies for the particular project that is being claimed for, then they might not qualify.

Larger companies (i.e. 500 staff or more, or more than €100 million turnover / €86 million in total assets), and SME’s whose projects have received funding, could qualify for the less lucrative but still highly beneficial Research and Development Expenditure Credit (RDEC) regime. Profit and loss-making projects benefit, in that if the company made a profit, the RDEC benefit reduces the corporation tax liability, and for loss-making companies, they receive a credit which can either be transferred to a cash pay-out or used in lieu of previous tax liabilities.

Your client’s company could claim via both schemes if applicable. For example, if they are an SME but one of the eligible projects has received a grant. Using both will maximise your client’s benefits.

Still not sure if your client qualifies?

Ask yourself the following questions:

Has your client launched a new product or project recently which could advance the fields of science and technology? Or are they planning on launching one? (The benefit applies even if the product/project fails.)Many companies have had to innovate or change direction to stay relevant, thanks to the current pandemic. Is your client one of them? This may include anything from new online tools to manage your business more effectively, to advances in telecommunications, to new product development.Does your client develop patents, prototypes, or software? Again, these are all indications that your client could be eligible for the R&D tax credit.Does your client employ engineers or scientists? Designing advancements on current systems, plotting new infrastructure, and experimentation are all R&D-qualifying criteria.Does your client work within the following industries? Agriculture, Manufacturing, Oil and Gas, Engineering, Architecture, Construction, Software, Food and Beverage.

Below are some ‘real-world’ examples of potential R&D tax credit claims.

Your client:

Is in the food and beverages industry and they are developing a new plant-based productIs attempting to enhance a current ventilation system to be more energy efficient for the air-conditioning industryIs enhancing their IT security systemsHas developed a new communication model or method of content deliveryIs a beer-brewer in the process of developing a new type of beer

made.simplr can help with your client’s research and development tax credit claim. Find out more here.

¹ Gov.uk, Claiming Research and Development tax reliefs
² Gov.uk, R&D tax relief for small and medium-sized enterprises

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