Research and development claims for small companies – how to claim

Research and development claims for small companies – how to claim

Small and medium sized companies can potentially claim for tax relief against their research and development (R&D) expenditure under HMRC’s Small and Medium-sized Enterprise Scheme. The idea behind this is to encourage innovation in general and to support the growth of smaller businesses.

When to make a claim

Claims for R&D relief must be made in your Company Tax Return or amended return. The usual time limit for making a claim is two years after the end of the relevant Corporation Tax accounting period.

How much relief can companies qualify for?

If your small company qualifies for R&D tax relief it’s definitely worthwhile claiming it as the tax savings can be very attractive.

If the R&D project started before 1 April 2012 there must be R&D related expenditure of at least £10,000 a year. For projects which started after this date the minimum limit no longer applies.

There is an upper limit of €7.5 million for the total amount of aid a company can receive on any single R&D project.

The current tax relief rate offered for qualifying R&D expenditure is 225%. This means that for every £100 of qualifying expenditure you make your company’s taxable income could be reduced by £125 in addition to the £100 actually spent.

If the company has an allowable trading loss for the R&D period the loss can be increased by 125% of the R&D expenditure. This means it can be increased to £125 for every £100 spent. The loss can be carried forward in the usual way as long as it is not converted into tax credits.

HMRC provides detailed guidelines on how to prepare your application for R&D relief which should be considered carefully before making a claim.

Showing HMRC the project is within the tax definition of R&D

If you are applying for R&D tax relief you must present the following questions with your answers when filing your Company Tax Return. It’s important to understand the tax definitions of the terms used as HMRC will review the answers given to determine whether they deem the R&D project as eligible for relief.

1. What is the scientific or technological advance?

This requires a statement of the scientific or technological advance being sought by the R&D. It is not enough that the project is commercially innovative; it must show an overall advance which could only be achieved through your project.

2. What were the scientific or technological uncertainties involved in the project?

Scientific or technological uncertainty is deemed to exist when knowledge of whether something is scientifically or technologically possible is not readily available or deducible by a competent professional working in the field. This cannot be something which could have been deduced from brief discussion with other professionals.

3. How and when were the uncertainties actually overcome?

This requires a description of the methods used to overcome the uncertainties. This should be high level, not in great detail, but enough to demonstrate that the process was innovative and not straightforward.

4. Why was the knowledge being sought not readily deducible by a competent professional?

It may be that others have tried and failed or it may be that little public information is available on the subject. In either case it must be shown that competent professionals deem the matter to be a scientific or technological uncertainty which requires investigation and not just a ‘routine’ uncertainty.

In addition to these answers the related costs must also be detailed. HMRC provides guidelines on what are allowable costs including:

  • Employee costs
  • Staff providers
  • Materials
  • Payments to clinical trials volunteers
  • Utilities
  • Software
  • Subcontracted R&D expenditure

It can also be possible to claim for R&D capital allowances in certain specific circumstances.

Subsidies and grants

If your company has received a subsidy or grant for an R&D project this may reduce the amount of tax relief you can claim. In this case you should refer to HMRC for further guidance.

How to make a claim

For SME companies you make a claim for R&D relief by putting an X in Box 99 of your Company Tax Return. You must enter amounts for enhanced expenditure in Box 101 as well as including the enhanced figure in your profit calculations (Box 3) or loss (Box 122) for the period.

If the company will be converting the tax relief into payable tax credits the amount payable must be entered in Box 87, Box 89 and Box 143.

HMRC encourages companies to tell them why they consider their project to be allowable as R&D and to provide a summary of the costs incurred along with how the figures in the return were calculated.

If you are considering making a claim for R&D relief for your own company you can discuss this further with your personal Intouch accountant.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Research & Development claims from small companies – what qualifies for R & D tax relief

Research & development claims from small companies

If you are a small or medium sized company who has invested in significant research and development activity it could be worth finding out if you qualify for R&D tax relief from HMRC under the Small and Medium-sized Enterprise Scheme. This will effectively act as a contribution to the expenditure you have incurred.  If you are considering making a claim the first step is to ensure that your company meets HMRC’s definition of an SME for R&D tax relief purposes.

HMRC’s definition of SME sized companies for R&D tax relief purposes

This definition is specific to R&D tax relief and is – confusingly – not necessarily the same definition as given for other tax areas such as PAYE.

To qualify, for R&D activity carried out from 1 August 2008, your company must have:

  • fewer than 500 employees
  • an annual turnover not exceeding €100 million
  • a balance sheet not exceeding €86 million

If your company is part of a larger enterprise or group it may not be considered an SME and may therefore not pass the above tests.

Your company must be a going concern at the time of the claim. Companies which are in liquidation or have ceased trading do not qualify for this Scheme.

If you are a subcontractor you won’t be able to claim under the SME scheme, but in certain circumstances you may be able to claim under the Large Company Scheme.

The Small and Medium-sized Enterprise Scheme

This scheme offers higher rates of relief than for larger companies, presumably to encourage growth.

What kinds of R&D projects could qualify for relief under this Scheme?

There are two key criteria which determine if an R&D project qualifies for relief:

  • It is not enough that the R&D advances your own company’s knowledge boundaries or capabilities to bring in more business. It must be of a calibre which advances ‘overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’.
  • If the R&D has taken place after 9 December 2009 it must be related to what your company does as a trade. This can be an existing trade or one you intend to start based on the R&D you have undertaken.

HMRC has very specific requirements for companies to demonstrate they qualify on the above points. These should be carefully considered before making a claim.

What R&D costs qualify for R&D relief?

To qualify for relief the activities and items which have been paid for must contribute directly to the advance of science or technology, or be a qualifying indirect activity, as defined by the Dept for Business, Innovation and Skills. The cost areas that HMRC specifically mentions as allowable are:

  • Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself.
  • Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D.
  • Materials – consumable or transformable materials used directly in carrying out R&D.
  • Payments to clinical trials volunteers – relevant payments to subjects of clinical trials.
  • Utilities – power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
  • Software – computer software used directly in the R&D.
  • Subcontracted R&D expenditure – you may be able to claim back 65% of what you spend on certain R&D activities carried out for you by a subcontractor. If the subcontractor is connected to your company or organisation special rules apply.
  • Capital expenditure – R&D Relief is only available for ‘revenue expenditure’ (day-to-day running costs, as opposed to capital expenditure). However, if you are involved in R&D and you spend money on capital assets you may be able to claim R&D capital allowances.

If you would like to discuss your company’s R&D expenditure or find out if you may be eligible for R&D tax relief, speak to your personal Intouch accountant.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.