An enormous £1.36 billion in Research & Development (R&D) tax credits was claimed by UK businesses last year. The government is putting a strong emphasis on R&D as the core of innovation and economic success, and is using these tax credits as a means of actively encouraging businesses to explore new ideas with a reduced financial risk to those businesses.
R&D includes developing new technology, products and processes, and any project which falls into these categories is eligible to claim R&D tax credits.
To date, it has been larger businesses who have taken advantage of most of this money, but lots of small businesses are missing out just because they have not heard of the scheme. So, here is a basic guide so that you can easily see if you can benefit from these tax credits.
Explaining R&D Credits
R&D Credits are a subsidy put in place to reimburse businesses who are investing in research and development. It is part of the government’s efforts to increase the amount of innovation in the UK, as they believe this is the key to future economic success. If you pay Corporation Tax, you can claim back up to 36.2% of your development costs – potentially adding up to thousands of pounds. The scheme works slightly differently for businesses of different sizes:
SME Scheme – businesses can take an extra 130% of their R&D costs off their annual profit and claim the tax credits from this amount.
R&D Expenditure Credit (RDEC) – larger companies can claim portions of salaries, National Insurance contributions, etc.
There are also a range of other costs which can be reclaimed depending on the size of your business and government expectations as to what a business of your size would be expected to spend on R&D. An R&D tax expert can help you identify which scheme you fall under and what you can claim against.
Who Can Claim R&D Credits?
The criteria for qualifying businesses is incredibly broad. If you are developing or improving products, processes or services, it is likely you will be able to claim under the scheme. Every single sector is covered in some way, so speak to your R&D tax consultant to check what applies to your circumstances.
There are also some general qualifying criteria. Businesses wanting to claim R&D tax credits must:
- Be a limited company in the UK
- Pay Corporation Tax
- Have carried out R&D activities
- Have invested money into R&D activities
It is intentionally wide-ranging to allow as many businesses as possible to take part in the scheme. We are all being encouraged to find new ways to tackle scientific and technological issues at all levels – you do not have to be aiming for a Nobel Prize. If you are investing money into solving some of the problems your business or your customers encounter, it’s likely you’ll be eligible. An R&D tax credit expert will be able to confirm this for you.
How To Claim R&D Credits
On the face of it, claiming R&D tax credits is simply a case of filling in the right parts of the CT600 Corporation Tax Return. However, there are lots of checks and balances in place to ensure claims are genuine, so if this is the only action you take, you might find yourself under investigation by HMRC.
There are specialist units across the UK which tend to deal with all the SME R&D Tax Claims, and they are very consistent in terms of the evidence they require before approving your claim. RDEC claims are dealt with by a department within HMRC. If either of these decision-makers think there are errors in your claim and suspect there may be inaccuracies in other areas of your business, they can expand their enquiry. There is a 30% penalty if you have made a mistake and overclaimed, so it is really important to make sure everything is accurate.
The majority of claims will need supporting evidence showing as a minimum:
- The R&D projects your business has undertaken and how they meet the eligibility criteria
- How your projects qualify as R&D
- Your process to make sure you are only claiming for eligible activities and costs
- Any money you are claiming against was spent in the previous 2 years’ accounting periods
As you can see, this supporting evidence requires a lot of details. To make sure you have got everything covered, it is best to consult an R&D tax specialist. This will make sure your documentation is complete and fulfils HMRC’s criteria, you have included all the eligible expenditure and have not inadvertently included something immaterial.
To get some advice about whether you can claim R&D Tax Credits and the best way to proceed, you can speak to the experts at Purple Lime by emailing hello@purplelime.uk.com or calling 01249 263 333.