R&D Tax Credits

A business can submit an R&D tax relief claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made (paragraph 83E(1) of Schedule 19 to the Finance Act 1998). This means that a business can make a claim for R&D tax relief going back 2 accounting years. The claim can be made in a company tax return or in an amendment to it.

Many businesses don’t realise that they are undertaking eligible qualifying activities. It is not uncommon for their accountants to forget to tell them about R&D Tax Credits or even to tell them that they don’t qualify. If your technical lead (the R&D manager, lead engineer, or lead developer) is struggling to overcome the technical challenges of your project – if they are scratching their head wondering how to proceed, or losing sleep worrying about the technical uncertainties they face – your project will almost certainly qualify for R&D Tax Credits.

HMRC will follow guidance in their Statement of Practice SP 05/01 to deal with claims that are late. The success of these appeals depends on the facts of the case in hand; however, it is very rare that HMRC will allow a late claim based on not having sufficient time or not being aware of the R&D tax relief scheme.

When you make a claim for R&D tax relief it will be reviewed and processed by one of the HMRC R&D specialist units. It is normal practice for an Inspector at the HMRC R&D unit to review the first claim that is made by a business. The Inspector will risk assess the claim and this will determine the level of reviews for subsequent claims. If the Inspector has any questions relating to the claim then they will raise an enquiry, which is usually done by writing to the company. We strongly advise that a claim for R&D tax relief is supported by a detailed report which outlines the technical advancement and uncertainties as well as providing a detailed breakdown of the eligible R&D costs.

One of the conditions for a company to make a claim under the SME scheme is that the expenditure is not incurred by carrying out R&D as a subcontractor. If a ‘large company’ subcontracts its R&D to an SME, then the SME can make a tax credit claim, but only under a Large Company Scheme. Where successful, this will enable the company to get a 13% gross deduction for qualifying R&D expenses.

Generally, if a company has received a grant for a project, this will not prevent them from claiming R&D tax relief. They will however, only be able to apply for this under the Large Company Scheme.

This means that if your company has received a relatively small grant your company could potentially lose money overall, as some grants can significantly reduce what your company can claim in tax relief. The difference between what the company can claim under the Large Company Scheme and the potential claim under the SME Scheme could be much higher than the grant itself. This is why you should always seek professional advice when making an R&D tax credit claim.

(See also: R&D Grants)

You will need to complete a Full Company Tax Return (CT600) and not a Short Company Tax Return.

If you are an SME, you will need to use CT600 (2015) Version 3 and complete the following boxes:-

• Box 650 - you need to put a tick in this box.
• Box 660 - you need to insert the total enhanced R&D tax relief. This is the original R&D expenditure plus the additional enhanced R&D tax relief.
• Box 875 will need to be completed.
• Box L168 (PAYE/NIC’s for which the company is liable in this accounting period) and L168A (Employer PAYE reference) on the CT600L form.

Common examples of software development projects that may qualify for R&D tax relief include:

• state-of-the-art software for new projects, or new functionality for existing R&D projects;
• tools to extend the functionality of application software programs or of an operating system;
• extensions to database software, programming languages, or operating systems;
• software development tools, such as tools to port data across platforms, tools for image processing or character recognition;
• novel data management techniques, such as new object representations and new data structures;
• innovative methods of capturing, transmitting, manipulating, and protecting data;
• software to run new computer hardware;
• software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or,
• means of integrating hardware and software platforms.

Common examples of product and process development projects that may qualify for R&D tax relief include:

• innovative product development using computer-aided design tools;
• development of second generation or improved products;
• tooling and equipment fixture design and development;
• developing unique computer numerical control programs;
• designing innovative programmable logic controllers;
• designing innovative manufacturing equipment;
• prototyping and three-dimensional solid modelling;
• designing and developing cost-effective and innovative operational processes;
• integrating new materials to improve product performance and manufacturing processes;
• evaluating and determining the most efficient flow of material;
• designing and evaluating process alternatives;
• designing, constructing, and testing product prototypes;
• developing processes that would meet increasing regulatory requirements; or,
• streamlining manufacturing processes through automation.

HMRC works to process applications for R&D Tax Credits within 28 days. However, the processing time required for HMRC to review and consider an R&D Tax Credit claim depends largely on the nature of the claim itself in addition to the complexity of a company’s structure and its accounting. Even the time of year can make a difference, with peak accounting times such as March and December being particularly busy and resulting in slower processing times.

You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets).

The main areas of costs that can be claimed are:

• staff costs (Incl. gross pay, employer's NI, reimbursed expenses and employer's pension contributions);
• agency workers (externally provided workers);
• subcontractors/freelancers;
• software license costs;
• consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process); and,
• payments to the subjects of clinical trials.

It is not uncommon for an R&D team to consist of many individuals from different parts of the business.

Your R&D project team may include the R&D Manager, a Lead Developer, Engineers, Project Co-ordinators, CAD Engineers, Quality Control and Testing specialists, and Cost Accountants, as well as members of the senior management team.

R&D Tax Credits for profit-making SMEs

The R&D tax relief would enable a profitable SME to reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction.

The current R&D tax credits rate results in a 24.7% benefit on R&D expenditure for profit-making SMEs. If the deduction is greater than the SME’s profit for the period, then this will create a loss for corporation tax purposes.

R&D Tax Credits for loss-making SMEs

Where the additional enhanced R&D deduction is greater than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes.

 The SME can then decide between the following options:

• carry back the loss to the previous accounting period (if there was a taxable profit);
• carry the loss forward and offset against future profits; or,
• surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.

The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period.

The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5%. So as the enhanced R&D tax relief is 230% a cash credit can be worth as much as 33.35p for each £1 of eligible R&D expenditure.

The Research and Development Expenditure Credit was introduced on the 1st April 2013 and replaced the original Large Company scheme entirely on 1st April 2016.

The key difference between the RDEC and the Large Company scheme is that the RDEC allows a loss-making company to receive a payable tax credit.

The RDEC is a taxable receipt and it is paid net of tax to companies with no corporation tax liability. From 1st April 2020, the RDEC rate was increased from 12% to 13%. From 1 April 2017, the corporation tax rate has been cut to 19% from 20%. The benefit would therefore be 10.53%.