You may have heard the term research and development (R&D) in the context of business and be wondering exactly what it means or how it works.
Many companies are able to make tax savings through R&D tax credits – but do not realise that they are available to them. Often, owner-managers might assume that a project must be highly technical to count as R&D, but you may be surprised by what the actual rules say.
Here, we explain the way R&D works for tax purposes, and outline ways you may be able to make successful claims that reduce your tax liability.
What is R&D tax relief?
R&D tax relief is given to a company that carries out a research project that makes a unique contribution or advancement in science or technology.
The project must be related to your company’s existing trade, or one you intend to use to start something new at the company. So, you wouldn’t be able to claim relief on a project that you complete in your own time or is not relevant to your industry, for instance.
Your business’s advancement in science or technology must be just that – an advancement. In other words, your project must solve a problem that no one has been able to solve, or make an innovative discovery that improves existing methods.
To help you design your project for R&D tax purposes, think about how you can:
- develop new systems
- customise or adapt processes to make them better
- develop a new technology or product
- devise a new method of production
- create a new working process.
If you include test, trials and analysis periods as part of your project, you will have more information to assist your claim for tax relief towards it.
What can you claim?
There are two types of R&D tax relief that companies can claim, the first being the SME R&D tax relief scheme, which is available to companies with fewer than 500 staff, a turnover below €100 million or a balance sheet total below €86 million.
Through the scheme, SMEs can deduct 130% of their qualifying R&D costs from their yearly profit, on top of the regular 100% deduction they’re entitled to.
Qualifying costs include costs on the project from when you start working on it until you make an advancement or the project is stopped.
You can also claim for your employee costs that were spent directly on the R&D project, including salaries, Class 1 National Insurance contributions and pension fund contributions – you can, however, only claim up to 65% of the relevant payments made to a third party you contracted for the project.
You may also claim tax relief for software licence fees you purchased for your project.
Second is the R&D expenditure credit (RDEC), which replaced the large company scheme in April 2016. It works much the same way as the SME R&D tax relief scheme in terms of what you can claim for, only the credit is calculated at 13% of your company’s qualifying R&D expenditure and is taxable as trading income.
If you’re an SME, you can also apply for the RDEC if a larger company subcontracted you to do R&D and you have either:
- received a grant or subsidy for your R&D project
- expenditure which is more than the SME scheme aid cap.
How to claim R&D tax relief
To claim your relief, you will need to enter your enhanced expenditure into your full company tax return form (CT600) (or we can do it for you).
To calculate your enhanced expenditure, you need to:
- work out the costs that went to R&D
- reduce subcontractor or external staff provider payments to 65% of the original cost
- add all costs together
- multiply the figure by 130% (for the SME R&D tax relief) or 13% (RDEC) to get your expenditure credit.
You can claim R&D relief up to two years after the end of the accounting period it relates to. We highly recommend you use the online Government service to support your claim.
You’ll need to provide details in your claim that explain how your project:
- looked for, and aimed to achieve, an advance in science or technology
- overcame scientific or technological uncertainty and how you did this
- could not easily be worked out by a professional in the field
You’ll need to provide other details, including the start and end dates of the accounting period relating to the R&D activity, which we can help you put together.
Talk to us for help with your R&D tax credit.