What are R&D Tax Credits?
The government provides tax incentives for companies that invest in research and development.
If you are a company where you have people and costs associated with project activities aimed at advancing what you do, then you could be eligible for R&D tax credits.
The government is keen to promote and encourage innovation and also make the UK an attractive location for companies who are advancing technology, products, processes and services. R&D Tax Credits were launched back in 2000 and the scheme is administered by HMRC. The concept is not unique to the UK as it is also available in some form or other across 41 other countries around the world.
The principle is very straightforward and is a win–win scenario for both the UK economy and the eligible companies. If the government can make it easier through tax relief for companies to invest in innovation then it is more likely that these companies will undertake innovative projects to benefit their business growth and contribute to the UK’s future success and standing.
The good news is that since its launch the benefits of the scheme have increased significantly, so there has never been a better time to claim.
What are the benefits?
R&D Tax Relief applies to both profit making companies paying Corporation Tax and also loss-making companies who are not, both are able to claim for eligible activities. Relief can be received as lowered Corporation Tax or in some cases as a payable Cash Credit.
If you have not claimed before you can claim for your eligible activities for the current accounting year as well as retrospectively for the two previous years. However, you must claim within two years which means that if you wanted to claim for two years ago you would need to do this before the end of your current accounting year.
- The amount you can claim for depends on the size of your company and the period for which you are claiming. The relief uses the concept of Enhanced Deductions. If you are a SME and have £100,000 of eligible expenditure then this will be ‘Enhanced’ by 130% to £230,000. This enhanced expenditure can reduce the amount of tax you need to pay or create a loss than can be exchanged for cash.
- The calculations are many and varied so the simplest way to help you understand what you might get in the form of SME tax relief (dependent on a number of contributing factors of course) is around 25p for every £1 you have spent on eligible activities.
THE KEY IS TO IDENTIFY AS MUCH ELIGIBLE EXPENDITURE AS YOU CAN; THE MORE YOU IDENTIFY, THE GREATER THE VALUE OF THE RELIEF YOU’LL RECEIVE FROM HMRC.
Who is eligible?
This is where HMRC’s terminology can create confusion and probably why so many companies failed to recognise that they were eligible for tax relief, even to this day.
This is not a tax relief scheme to reward hard work or for activities that create more of what is already available. In the words of HMRC it was created to benefit companies striving to achieve technical and scientific advances through projects that extend the current industry baseline, and where uncertainty in the outcome exists and the methods used to achieve success are not readily deducible. See what we mean? It’s not particularly clear what’s eligible and what’s not.
Whilst this terminology is not clear to the vast majority the important thing to understand about the scheme is that it is based on interpretation. With so many different industries and different activities it is impossible to have an all-encompassing legislation, so accurate claims rely on intelligent and knowledgeable interpretation against the letter and spirit of the scheme.
Important to remember:
- Tax relief applies to all eligible project costs, whether they were successful or not. The government understands that true innovation can come from many failures so the costs incurred in eligible project failures can qualify for tax relief.
Here are the basics about eligibility.
Let’s start with a technical or scientific advance that advances the industry baseline.
A simple way to understand this is to look at the intended outcome of a project, i.e. ‘what is the advance that will be achieved?’. The diagram below shows some example results that could be eligible, but it’s important that you can quantify the level of advance e.g. 20% faster.
Now let’s look at the project processes...
The people you use for the projects are suitably qualified and competent to carry out the work
You cannot guarantee a successful result when you start the project
You experiment during the course of the project to try and achieve the desired result
You can demonstrate that you have gone beyond the obvious solutions that may exist
Ways to claim
Self-claim: Whilst you understand what you do, it is less likely that you fully understand all aspects of the scheme and how to interpret it, and therefore self-claims often result in lengthy engagements or enquiries with HMRC owing to incorrect claims.
Your Accountant: The accountant route is often assumed to be the logical choice because it is a tax process, however, if the claim is assessed properly the activity is 80% technically focused. The great majority of accountants are not technical and will not understand what you do, how you do it, the context of your projects and known industry alternatives and therefore generally submit conservative claims that are largely under the legitimate entitlement for the client.
R&D Providers: When it comes to service providers there is a real disparity in their propositions. Some are just accountants side-lining in R&D claims but with no technical expertise, others rely on the client to do the majority of the work involved in the process, and a very few may have some limited technical expertise across a few specific industries. The specialist partner choice you make can impact you in terms of the time, risk and complexity that your business faces as well as the accuracy and value of the claim.
What size of companies qualify?
All sizes of companies can qualify, however, the scheme benefits vary dependent on what size of company you are, but there is one very important fact to enable you to claim – that you are a Registered Limited Company.
SME: Fewer than 500 FTE employees and less than €100m turnover or €86m capital assets.
Large Company: Anything above the SME requirements.
BUT….. it is not as simple as this in some circumstances, ownership of your company can impact which scheme you qualify for. If you are part owned by a Large Company then you may be assessed under the Large Company scheme.
What costs qualify?
Utilities (water, fuel, and power)
Subcontractors (SME only)
Clinical trial volunteers
Software and consumables specifically for the project
Externally provided workers
Prototypes related to manufacturing trials
Expenses related to manufacturing trials
How can ABGI help you?
- ABGI makes the process simple, providing a complete end-to-end service in claiming R&D tax credits on your behalf.
- We’ve secured millions of pounds in benefits for UK clients, identifying £3.3 million in eligible R&D activity every single week.
- Our staff have a special blend of technology, tax and financial expertise, keeping you in safe hands. We reduce the risk of an HMRC enquiry and will defend your claim.
- We approach R&D Tax Relief from the point of view of examining the technology employed, rather than as purely an accountancy issue, thereby delivering a precise, robust and maximised claim for our clients. (See enclosed "steps to claim" guide for insights as to the process you will go through with ABGI)
Partnership is the way to go
The key is to identify as much eligible expenditure as you can; The more you identify, the greater the value of the relief you’ll receive from HMRC.
So the ideal partnership to deliver the best results for any client is the combination of a specialist technical R&D tax relief advisory firm such as ABGI, who speaks both your language and HMRC’s; and your accountant. In collaboration they can manage the assessment, preparation and submission on your behalf, ensuring you receive the biggest return for the least possible effort, whilst keeping you safe from HMRC enquiry.
For a free R&D tax credit consultation and analysis of the potential returns you might expect from your projects, contact the ABGI Team:
📞 0203 984 0321
✉️ email: firstname.lastname@example.org