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R&D Tax Credits provide an excellent opportunity for companies to fund their innovative activities by offsetting some of the research and development costs. But what kind of work would be accepted as relevant R&D, and is there a limit on how far back you can claim? Here we take a look:
Generally speaking, HMRC is likely to award R&D Tax Credits if the aim of a project is to achieve an overall knowledge, advancement or capability in a scientific or technological field. It could also involve resolving a technological or scientific uncertainty. So what does this mean?
For any R&D work to be eligible for R&D Tax Credits it must address a certain amount of uncertainty, i.e that its conclusion isn’t immediately obvious from the outset. However, the good news is that ultimately it doesn’t matter if your project fails in its goal - in fact it’s much less likely to qualify if success is guaranteed. It’s this element of uncertainty that’s important here. Essentially, knowledge around whether a particular outcome is technologically or scientifically feasible, or how it may be achieved in practice, should not be easily deducible by any competent professional working in the field. The solution that the R&D work is required to come up with must not, in any way, be obvious.
HMRC is very clear about what it considers to be an uncertainty that can readily be resolved by a competent professional. It specifically rules out a company merely tinkering with an existing idea - it’s important that a product, process or service is overhauled completely or that a new one is designed from scratch. The R&D work has to involve a technological or scientific progression that genuinely pushes things forward.
It may however not be obvious to you about whether your project qualifies, which is why we strongly recommend the services of R&D tax relief professionals like ourselves. We can go through your claim with a fine-tooth comb, answer any questions you may have and give you the very best chance of success.
Innovative companies can claim R&D tax relief on certain everyday operational costs. However, money spent on fixed assets like buildings and land - known as capital expenditure - does not count as R&D expenditure for the purposes of an R&D tax relief claim.
Broadly speaking, eligible R&D expenditure includes:
Additionally, larger companies claiming through the RDEC branch of the scheme can include contributions to individuals or certain research organisations where eligible R&D work took place.
Certain consumables that are transformed or used up in the course of the R&D project may be eligible for a tax relief claim. This includes things like power, fuel and water. Other common examples include materials used in developing prototypes used in trials.
One point to note is that once the R&D work is complete, any additional expenditure on consumables (like materials used in marketing or cosmetic fine-tuning) cannot be included in a claim. This means it’s essential to be careful as only consumable costs relating to your R&D work will qualify.
Companies that are claiming under the SME branch of the scheme - which is determined by staff headcount, turnover and balance sheet for tax purposes - can claim between 15% and 33% of R&D costs. Larger companies qualifying for the RDEC scheme will be eligible to claim 12% of their R&D expenditure back as tax credits.
Again, it’s important to claim under the correct branch of the R&D Tax Credits scheme - this is something we will be pleased to advise you on.
R&D Tax Credits can be claimed up to two years after the end of the accounting period during which the innovative activities took place. It can be done even if your corporate tax return has already been filed (in fact it’s often easier to do it this way by simply submitting an amendment).
The R&D Tax Credits scheme is a government tax relief that encourages UK businesses to innovate by helping with some of the costs. Companies generally apply for tax credits along with their annual tax return. However, as HMRC allows up to two years to pass, there’s plenty of time during which an application can be submitted.
Let’s imagine a company conducted eligible R&D work between January and July in 2018, and that its financial year ended 1st September. In this case, the company’s application deadline would be 1st September 2020.
It doesn’t matter if a company has already filed its Corporation Tax return for the period in question. As long as less than two years from the end of the period has passed, a tax return can simply be amended. As mentioned, we actually recommend companies make an application for R&D Tax Credits via an amendment of their CT600. It’s a handy shortcut because it in fact speeds up HMRC’s processing time. This is because the filing is rerouted straight to an HMRC R&D specialist who will have a better understanding of your application, rather than going to someone at HMRC who may not have this specialism.
Hopefully we’ve provided a clearer understanding of what will - and will not - count as R&D for the purposes of tax and how far back you can claim. However, there’s still plenty we haven’t covered and the application process is notoriously complex. Not only is there a large amount of paperwork, there’s plenty of room for error - which can be stressful and costly if uncovered by HMRC. So let us help you make sure your application process for R&D Tax Credits goes smoothly every time.
If you need further advice about your R&D Tax Credits application, please feel free to get in touch. We are a team of R&D tax relief specialists with years of experience who can guide you through.