Research & Development Tax Relief Explained
Research and Development (R&D) Relief is an HMRC relief that may reduce your company’s Corporation tax bill. The tax relief has been available to Small & Medium-sized (SME) companies since 2000 and larger companies since 2002.
The scheme offers additional tax deductible expenditure for costs incurred on additional projects.
What is an Eligible Project?
Potentially any project where you have tried to overcome a scientific or technological uncertainty such as:-
- trying to develop a new product or process;
- trying to make a significant improvement to a product or process
- trying to make a product or process more environmentally friendly
- trying to stay ahead of changes to regulations
Why Should I Claim?
In a recent survey, HMRC announced that they estimated only 10% of the SME’s that they thought likely to be eligible to claim R&D Tax Relief had actually submitted a claim.
What do I Stand to Gain?
If you have an eligible project in the previous two accounting periods, you may be eligible to a refund of overpaid corporation tax. In addition, if you are an SME and made a loss for corporation tax, you may be eligible for a tax credit. If you are claiming in the current tax year then ultimately your tax bill will be reduced.
We can also give you advice on how to structure your projects in the most tax efficient way possible.
How Does it Work?
The following is very simple example under the SME Scheme:-
- Taxable Profits for the year £100,000
- Corporation Tax at 20% = £20,000
- Expenditure on an eligible Project = £20,000
- R&D Tax Relief at 125% = £25,000
- Therefore profit after R&D Tax Relief = £100,000 – £25,000 = £75,000
- Actual tax paid at 20% therefore equals £15,000
Tax saving through R&D Tax Relief therefore equals £5,000
What are Eligible Expenses?
Eligible expenses are costs that would normally appear in your profit and loss account. These can include wages and salaries, employers NI contributions, pension contributions, hiring agency staff, sub-contracted work (SME Scheme Only). Materials consumed in the research and development plus prototype expenditure.
I don’t do my own R&D Expenditure, but I am Subcontracted to, can I Still Claim?
Many companies fall into this situation, particularly those that are involved in design manufacturing. The answer is yes, if the company sub-contracting to you is not an SME and you are adding significant value to the R&D project.
Why can’t I use my own Accountant or Tax Adviser to Claim?
You can, but before you do, ask yourself these questions:
- Why haven’t they spoken to me about R&D Tax Relief before?
- Will they have the specialist knowledge to help identify all of the eligible projects and to maximise my claim?
- Will they prepare a suitable report to support my claim?
- Will they work on a n”no win, no fee” basis?
- Will they be able to fully support me in enquiry by HMRC?
Industries Ideally Placed to make a Claim?
Industries where R&D is commonplace include:-
Aerospace | Clinical Research | Communication & Media | Defence | IT | Motorsport | Pharmaceuticals | Product Design | Software Development | Telecoms |
However R&D is possible in many other industries such as:-
Agriculture | App Development | Architects | Banking | Brewing | Electronics | Engineering | Environmental | Food | Manufacturing | Processing | Testing | Training | Transport |
Generally, if you are employing, scientists, engineers, software developers or technicians, you are likely to be undertaking some for of R&D,
If your industry isn’t listed and you think you are doing R&D please call us to discuss. No industry is excluded and we can still help you to identify eligible projects.