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
- Payments to clinical trials volunteers
- 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.