Have a quick of the following piece and you may realise you have a potential claim. Many businesses are missing out on making a claim because they simply don’t know about the relief. Others are missing out because they don’t know where to start. Hopefully, you won’t fall in either category after a few moments, let’s see…
Think that R&D (Research and Development) is something that only goes on in ‘ivory tower’ scientific businesses? Think again – it can happen in any scientific, engineering and technological field and this covers a broad range of businesses. Better still – you can claim tax relief on some or all of the cost!
So what will HMRC class as R&D? First of all, forget about what a scientist, engineer or even an accountant might consider R&D – you have to work with the legislative definition. The work must be research or development in design or engineering which overcomes technological challenges. This includes creating new processes, products or services, or making significant improvements in existing ones – but merely developing existing products. To qualify, the R&D must achieve the following:
- an advance in the field of science or technology
- an advance that extends the overall knowledge or capability in that field, not just your company’s own state of knowledge or capability
- overcomes (or seeks to overcome) an uncertainty that can’t so far be readily resolved by competent professionals in the field and/or where solutions are not common knowledge
So, no pressure then! Before you stop reading this because you think your company doesn’t do any of these things, have a look at the sort of projects that might qualify. These include software development, new construction techniques, engineering design, bio-energy and cleantech. Maybe you’ve come up with an innovative product or service, or maybe you’ve thought of a way of delivering your product or service that no-one else has thought possible. It doesn’t have to involve men in white coats working on sourcing and using materials from the planet Zog. It really doesn’t have to be rocket science (and anyway I understand that rocket science is relatively straightforward once you know what you’re doing!)
One of the most difficult things to judge is whether or not what you’re doing is likely to fit into the legislative definition. There are HMRC specialist R&D units whom you can contact at an early stage, for guidance on whether you’re likely to qualify, so don’t be afraid to ask for help. Either at this stage or when you make a claim, you’ll need to be able to explain the following points:
- Focus on what you see as the scientific or technological advance being achieved, rather than merely describing what your process or product is. It’s not enough that it’s commercially innovative (although that’s a good starting point)
- Describe the scientific or technical uncertainties or challenges that you have had to overcome. Not every problem encountered is an uncertainty. A key test is whether professionals in your field would already know whether what you’re doing is feasible or, if so, how to achieve it. The mere fact that no-one else has yet done this is not necessarily enough to make it an uncertainty. There’s a bit of a crossover here with patent law – but a commercial innovation can be patentable but yet still not qualify as R&D in legislative terms.
- You need to set out what happened, how you identified challenges and what you did to resolve uncertainties (including failures as well as successes) and also cover the context of what has been done before by others, to show why your process or product (or improvement) advances knowledge or capability.
The period for which you can claim relief is from the start of the project (when you have identified the uncertainties to be resolved) until the point where the uncertainties have been resolved (which is usually before you start production). However, if new uncertainties arise after you start production, you can claim for the cost of resolving these (as long as they fit the R&D definition)
What you can’t claim for
- Market research or feasibility study
- Patent or other intellectual property protection
- Pre-production design
- Upscaling from trial or pilot
- Commercial application
- Anything in the field of arts or economics or other fields that do not involve science or technology
For the parts of your project that qualify as R&D, you can claim salaries, wages, class 1 NIC and pension fund contributions for staff directly and actively engaged in the project (both ‘hands on’ and managerial or supervisory time) but not support staff (e.g. admin and clerical) unless this is work qualifying as an indirect activity on the R&D project such as security or maintenance. If you use externally provided staff to work directly on the project (that is, not employees or sub-contractors) you can usually claim relief on 65% of the costs paid to the staff provider. You can also claim this percentage of the costs paid to a sub-contractor (but not in general to another third party, although there are some exceptions).
Cost of consumables (or a fair proportion of them) can be claimed (although not materials incorporated into products to be sold) and also the cost of software used on the project. Maybe you need to build a proto-type – you can claim the design, construction and testing costs for this, unless you intend to sell the prototype itself (in which case materials and construction costs would not qualify).
Working in collaboration with another company? Both companies can claim relief on their own qualifying expenditure.
How to claim R&D relief
From 1 April 2015, under the SME Scheme a company can get 230% relief on their qualifying R&D costs. Loss-making companies can in certain circumstances surrender their losses in return for a payable tax credit.
Research and Development Expenditure Credit (RDEC) scheme – from 1 April 2015 a taxable credit is available at 11% of qualifying R&D expenditure. (For loss-making companies the tax credit is generally fully payable).
Various rules apply where companies have linked or partner companies and a company receiving a grant or subsidy which is classed as ‘notifiable State Aid’ cannot also claim SME R&D Relief (but will qualify under the RDEC Scheme).
You must make any claim for R&D tax relief in your Corporation Tax return or amended return. The normal time limit for making your claim is 2 years after the end of the relevant Corporation Tax accounting period. This is the accounting period in which any qualifying activity takes place – not the accounting period in which the qualifying project comes to an end.
If you’re just claiming relief, this will reduce your company or organisation’s profit chargeable to Corporation Tax for the relevant accounting period. However, if you’re giving up your enhanced relief to receive tax credits instead, or if you’ve submitted a claim to carry back a loss to be set off against profits of a previous accounting period, HMRC will make the payment after they receive your return.
You may qualify for Advance Assurance which means that once your application for Advance Assurance has been accepted, for the first 3 accounting periods of claiming R&D tax relief, HMRC will allow the claim without further enquiries.
Please note that R&D tax relief only applies to revenue expenditure – generally, costs incurred in the day-to-day running of the business, not to money spent on capital assets. But you may be able to claim relief for capital expenditure as a ‘Research and Development Allowance’.
HMRC do not impose any specific recordkeeping requirement for R&D tax relief claims, but you do need to keep records that will enable you to identify qualifying costs to support your claim.
That’s only an overview, and do take professional advice if you think you qualify. I’d love to hear how you get on!