The R&D Tax Relief incentive is designed to encourage innovation and increase spending on R&D activities for companies operating in the UK. It’s one of the government’s top incentives for encouraging investment in research and development and allows up to 33.35% of a company’s R&D spend to be recovered as a cash repayment.

Many businesses don’t realise that they qualify for R&D Tax Credits or that they are not claiming their full entitlement. The R&D Tax Relief scheme has been in existence for over 17 years and nearly £2bn per annum is currently being claimed. On average SMEs are claiming £46,000 each per year.

The SME R&D Tax Credit scheme was first introduced in 2000 and the rates have increased significantly since then. The current rate results in a 24.7% benefit on R&D expenditure for profit-making SMEs and 33.35% can be achieved for loss-making SMEs. The Large Company scheme commenced in 2002 and the Research and Development Expenditure Credit (RDEC) scheme for Large Companies was introduced from April 2013. The current RDEC rate is 12%, which results in a net benefit after tax of 9.7%.

Any company in any industry may be eligible for R&D Tax Credits. The key is that the company must be undertaking development activities that seek to achieve an advancement in technology. The project must contain a level of technical uncertainty for a competent professional, so if you faced questions that left you and your team scratching your heads to find a solution, that’s a good indication that qualifying R&D activities were taking place. If your company is taking a risk by innovating, improving, or developing a process, product, or service, then it can also qualify for R&D tax credits.

A good test to determine if the work undertaken qualifies for R&D tax relief is whether your project team faced technological uncertainties at the start of the project. That means that your team did not know from the outset whether a particular technological goal was achievable. If you can show that your project goes beyond applying existing technologies and demonstrate that it breaks new ground, you can claim R&D tax credits.

For a company to be regarded as an SME it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A Large Company is any company that exceeds the SME thresholds.

help me determine my eligibility

R&D tax relief claims are monitored and processed by HMRC. The relief will need to be claimed by completing a few boxes on the Company Tax Return (CT600). If the Company Tax Return has already been submitted it is possible to file an Amended Company Tax Return. You can make an R&D tax relief claim going back 2 accounting periods. Although it is not a legal obligation we recommend that an R&D tax claim report is produced that justifies the technical advancement and uncertainties as well as details the eligible expenditure that is being claimed on a project by project basis.

Once an R&D tax credits claim is submitted to HMRC, they will usually process the claim within 4 to 6 weeks providing that they are in receipt of all supporting documentation. Priority is given to claims that result in a tax credit payable as HMRC has an internal target to process these claims within 28 days. The process may take much longer if HMRC raises an enquiry into the claim.

When making a claim for the first time it will most likely be looked at by an Inspector from a specialist HMRC R&D unit. If no R&D claim report has been submitted or the report is not in sufficient detail and/or has errors then the Inspector will most likely raise an enquiry and write to the company or agent. The letter will request the supply of detailed project and costing information. The Inspector will want to ensure that the R&D projects amounts to an advancement in technology over and above what is currently available within the industry sector. The Inspector may want to visit the company in order to undertake an on-site audit. The Inspector will risk-assess the claim and this will determine the level of inspection for future claims. HMRC may raise a penalty if the claim does not clearly amount to a technological advancement or contains errors.

In terms of qualifying tasks, the following activities would be considered eligible for R&D tax credits:

• defining technical objectives;
• identifying uncertainties;
• feasibility studies;
• reviewing new and competing technologies;
• analysing, designing and developing the technology;
• producing technical specification or other documents to explain and support the R&D project and advancement;
• testing the product, process or software;
• planning and managing projects.

In addition, certain indirect support activities may qualify for R&D tax relief, such as:

• administration, finance, and personnel services specifically required to support R&D activities;
• training to support R&D.

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, and
• consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process).
• 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 26% 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:
• 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. The current RDEC percentage is 12% and therefore at a corporation rate of 20% the net cash benefit to a large company is 9.7% of the qualifying R&D expenditure.

You can find out more about corporation tax research and development tax relief on the GOV.UK website.

help me make a claim

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.

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 every 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.

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 530 - this will need to be completed if you are claiming a tax credit payable amount.

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 entitle the company to a 25% deduction for qualifying R&D expenditure.

Where the SME is making a claim under the Large Company Scheme, losses arising from that expenditure cannot be surrendered for a payable tax credit.

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 potentially if your company has received a relatively small grant your company could 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)

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.

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.