How to claim R&D tax credits for the first time

ABGI makes the process simple, providing a complete end-to-end service in claiming R&D tax credits on your behalf.

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About R&D Tax Credits

R&D Tax Credits are a tax incentive from the UK Government designed to encourage companies to invest in R&D. The scheme has been around since 2000 and last year over 39,000 UK companies claimed almost £3.5bn in tax relief. Only Limited Companies qualify - the scheme is not available to sole traders or partnerships. R&D tax relief can be used to reduce your tax bill or paid in the form of cash credits for loss-making companies.

Tax benefits of R&D claims

The effect of an R&D claim is to reduce taxable profits / increase taxable losses. The claim can: reduce profits, reduce profits and create a loss, or increase pre-existing losses. There are three main types of tax benefit that arise from a claim for R&D tax relief, namely:

1.

Payable cash credit

For loss-making SMEs, the payable cash credit is not treated as taxable income. For loss-making Large Companies, the payable cash credit ( see RDEC section) is treated as taxable income.

2.

Rebate of corporation tax

Companies that paid tax in the previous two years can roll back the relief to get a rebate of Corporation Tax. (This is tax they would not have paid if they had made the claim at the time.)

3.

Enhanced deduction

That can be carried forward. Some companies will have no option but to keep the relief for use in future years and others will choose to do so because they are confident that they will be paying tax at a higher rate in the future.

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SMEs and large companies

An SME is a company with fewer than 500 FTE staff that satisfies at least one of the following conditions: revenue less than €100m / balance sheet assets less then €86m. Only SMEs can access the SME scheme. Under the SME scheme the rate of relief can be as high as 230%. Lossmaking SMEs have the option to surrender some of their losses for a payable cash credit from HMRC. A Large Company is generally one with 500 or more FTE staff, or one with under 500 staff but revenue greater than €100m and balance sheet assets greater than €86m. SMEs may need to claim under the RDEC scheme, under certain conditions.

credit calculation and receipts

The RDEC Scheme

The Research and Development Expenditure Credit (RDEC) scheme has been introduced for any R&D expenditure being claimed under the large company scheme as of 1st April 2013. It allows large companies, and SMEs forced to claim under RDEC, to obtain a payable cash sum, if they are loss-making or an offset of tax payable if they are profitable. It replaced the Large Company Scheme with effect from 1st April 2016. The value of the ATL tax credit is 11% of qualifying R&D expenditure. However, as this is “above the line” the credit is subject to corporation tax.

What kind of activity qualifies?

What constitutes R&D for most people may be very different from HMRC’s interpretation, leading to at best, wasted time and at worst, an HMRC investigation.

Qualifying R&D activity can

  • Be undertaken in almost any industry
  • Include trying to make something cheaper, faster, smaller, larger or longer, etc

It can even include duplicating a product, process, service or device, as long as it’s in an appreciably improved way.

According to HMRC, a company is undertaking R&D when they're

  1. Overcoming technological uncertainties aimed at...
  2. Achieving an advance in technology...
  3. Which isn't readily deducible by a competent professional

Encouragingly, R&D is still deemed to have taken place whether or not the project is actually successful: it’s the “seeking” that counts.

Engineering

  • Improvements to manufacturing processes or machinery (doing things faster, at a better quality, with reduced waste or improved safety)
  • Ergonomics – ease of operation or suitability of manufactured products.
  • Computer models – for example, to evaluate stresses or fluid flow.

Manufacturing

  • Using new, unproven methods of manufacturing existing products.
  • Developing ways of manufacturing new products.
  • Increasing process efficiency / safety
  • Reducing emissions

IT & Software

  • Incorporating new or untested technology into products, where experimentation is required to select the best implementation route.
  • Testing new technology or programming languages, where there’s little information on their usage in the public domain.
  • Making existing products work on new platforms, where this involves overcoming technical problems that haven’t been solved before.

Scientific & Technical

  • Genetic analysis of agriculturally important organisms or phenotypes.
  • Development of protocols for the identification of disease agents.
  • Development of new biomarkers (ie molecules that can act as a flag for disease)
  • Making improvements to the specificity or accuracy of test protocols.

Engineering

  • Improvements to manufacturing processes or machinery (doing things faster, at a better quality, with reduced waste or improved safety)
  • Ergonomics – ease of operation or suitability of manufactured products.
  • Computer models – for example to evaluate stresses or fluid flow.

Manufacturing

  • Using new, unproven methods of manufacturing existing products.
  • Developing ways of manufacturing new products.
  • Increasing process efficiency / safety
  • Reducing emissions

IT & Software

  • Incorporating new or untested technology into products, where experimentation is required to select the best implementation route.
  • Testing new technology or programming languages, where there’s little information on their usage in the public domain.
  • Making existing products work on new platforms, where this involves overcoming technical problems that haven’t been solved before.

Scientific & Technical

  • Genetic analysis of agriculturally important organisms or phenotypes.
  • Development of protocols for the identification of disease agents.
  • Development of new biomarkers (ie molecules that can act as a flag for disease)
  • Making improvements to the specificity or accuracy of test protocols.

What costs count for tax relief?

Having established that you have eligible activity, its then all about what you have spent. Here we look at some of the different types of costs that can be included in and R&D tax relief claim.

Subcontractors (SME only)

SMEs can often claim for subcontractors involved in their R&D projects. However, this can be a complex area. Jumpstart Technical Analysts are trained to help our clients to work out which subcontractors they can claim as eligible and which they must exclude.

Consumables

Companies can claim for items that are used up in the process of R&D, such as chemicals, materials, batteries and certain forms of tooling. These costs can be significant for prototypes* and ‘first in class’ items, and it is important that clients do not claim too much.

*Prototypes

Construction of a prototype can be treated as ‘directly contributing’ to seeking an advance in science or technology, but only if it is created solely for use in the R&D. It’s important that the prototypes are actually scrapped. If you end up selling them, they will not be considered part of the R&D project.

Contributions to independent research (LCs only)

If Large Companies fund independent research by charities, education institutions or health service bodies, these payments can be eligible for relief.

Software

Companies often buy software to allow them to conduct, project manage or report upon R&D projects. This software can be claimed as eligible. Note that this is distinct from companies that are developing their own software in projects which may or may not contain eligibility.

Externally Provided Workers (EPWs)

These are workers that have been paid through an agency. In practice EPWs are:

  • Individuals (not companies)
  • Are not employees or directors of the company making the claim for R&D tax relief
  • Are obligated through contract to provide services to the company making the claim for R&D tax relief.
  • Are paid by the staff provider, not the company making the claim for R&D tax relief.
  • Self-employed consultants cannot be EPWs, but may instead be treated as subcontractors if they are contracted to perform a specific task or activity within a company’s R&D project.

Subcontracting

Just because a company is subcontracting work doesn’t mean that it is necessarily subcontracting R&D or even the routine work required to support its R&D. It may not have any R&D at all!

Under the SME scheme, 65% of the payments to subcontractors can be claimed except if the SME is connected to its subcontractor (e.g. is its parent, part of the same group, or are under common control). The rules are different for connected subcontractors.

Under the RDEC scheme, payments to subcontractors cannot be claimed except if the Large Company’s subcontractor is a university, college, charity, research organisation or health service body. SME’s.

There is no requirement that the subcontractor should be in the UK. However, it is important that the subcontractor must be engaged to perform a specific task rather than providing a service.

Staff (direct and indirect)

Direct staff are those involved in core development work as described in the technical report. Indirect staff are those involved in work to support the direct staff, and typically work in Finance, Admin, Maintenance, Personnel and Training.

Clinical trial volunteers

Payments made to people who volunteer to participate in clinical trials can be eligible.

SMEs Large companies
Staff (direct and indirect)
Externally provided workers
Subcontractors
Consumables
Software
Contributions to independent research
Clinical trial volunteers

Am I eligible for R&D tax credits?

If your company invests in research and development, you could be eligible for R&D tax credits. Answer a few quick questions to find out if your research and development expenditure could qualify.

Take the eligibility questionnaire

In just a few moments you’ll know if you’re eligible…

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Tax credits eligibility FAQs

What is eligible expenditure?

For eligible projects, it is the money spent on salaries, externally provided workers, subcontractors, software, utilities and materials ‘consumed or transformed’, such as chemicals, materials, batteries and certain forms of tooling.

My Accountant said I am not eligible for R&D tax credits. Is there anything else I can do?

That may well be the case. However, as R&D Tax Specialists, we can often find genuine eligibility where a non-specialist (most Accountants) cannot. Get in touch with us to talk it through.

Can you work with my accountant?

Yes – we have worked with many Accountants over the years. Contact us to find out how we can work together.

Working together with accountants, we find and maximise the eligibility while accountants utilise its tax benefit. We always complement rather than compete.

How does sub-contracting affect an R&D Tax relief claim?

Subcontracting can be a tricky situation in an R&D tax credit claim, but it doesn’t necessarily mean you can’t claim. You need to be very sure about your contractual situation, the work you are contracted to do and who is bearing the brunt of the cost, as all these can have an effect on the eligibility of subcontracted work.

What percentage of sub-contractor payments can be claimed?

Under the SME scheme, 65% of payments to sub-contractors can be claimed except if the SME is connected to the sub-contractor (e.g. is its parent, part of the same group, or are under common control). The rules are different for connected sub-contractors.

Does the sub-contractor have to be in the UK?

No. There is no requirement that the sub-contractor should be in the UK. However, it is important that the sub-contractor is engaged to perform a specific task rather than providing a service.

Can I claim for R&D even though I’m loss making?

Yes! The crucial thing is that companies have to be spending money, and the more they have spent on eligible activities, the greater the benefit and some loss-making companies may be eligible to receive a cash credit.

How much can I claim?

Use our R&D tax relief calculator to find out how much you could claim.

The SME scheme has a rate of R&D expenditure tax relief as high as 230%, while RDEC (the research and development expenditure credit) is worth 12% of your qualifying R&D expenditure.

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