R&D Tax Credits: Complete R&D Tax Relief Guide

In 2000, the government of the United Kingdom introduces a scheme from which companies can get help for their research and development (R&D) projects, specifically in science. Research and Development expenditure credit is a corporation tax (CT) relief to reduce your company tax bills if your company is liable for corporate tax.This article will make it easy for you to understand the concept of this relief and how it works for SMEs. If your company is not liable with CT, you can still benefit from this relief. Through the research & Development expenditure Credit (RDEC) scheme, which was passed in the finance act 2013. It enables a reduction of tax or a cash payment for qualifying taxpayers.

What is R&D relief/R&D Tax Credits?

Research and development relief is support for companies that want to advance in science and technology with their innovative approach. It allows companies to claim some extra CT deduction for their qualifying expenditures. A range of companies can claim this relief for their research projects.

The eligibility criteria to claim R&D relief is

  • less than 500 staff
  • either a turnover of 100m euros or balance sheet total (less than 86m euros)

You need to make clear if you are a linked company and have partners from other companies. The data from all the linked companies would be accounted for. This is how it works:

r&d tax relief linked company

Which projects qualify?

You can qualify for this relief if your company does research work in the science and technology field. It is for both “white coat” and “black coat” scientific and developmental work that includes easing technology problems through engineering tools.

The projects which can qualify include: devising new processes, services, or products, making improvements to existing ones, and innovatively replicating the current processes. But the development of a pure product itself doesn’t qualify.

Some examples of such projects:

  • Software development
  • New construction techniques
  • Bio-energy
  • Agri-food
  • Cleantech
  • Life and health sciences

Show if your project fits in the definition of R&D relief tax:

To show whether your project is r&d tax credit worthy, you need to make sure it is science and technology that will advance the relevant field. Social sciences, arts, and humanities work doesn’t count in science. Instead of stating the product, it process, and functionality, explain the sought developmental process.

Mention the uncertainties during the process and how professionals solved them, and either it’s a routine uncertainty or technological uncertainties. Explain how these uncertainties affect the overall activity of the process.

If you couldn’t find enough data on resolving uncertainty, you might outline the professional’s background, qualifications, and recent experience in the field to solve the issue.

Must know the start and end of a project for R&D relief tax:

If you want HMRC R&D tax relief, you should know when a project starts and claims the right amount. A project begins when working on resolving the uncertainty, and it ends when the issue gets resolved.

The following figure demonstrates the qualifying and non-qualifying factors of the project plan.

What costs qualify?

The following costs can qualify for the R&D relief:

  • Direct and externally supplied staff
  • Consumables
  • Software
  • Subcontracted R&D
  • Prototyping
  • Independent research costs

What costs do not qualify?

You cannot qualify for land costs, the production and dispersion of goods and services, Capital expenditures on any of the R & D relief schemes, and payments of patent creation and use.

Subcontracted R&D

If your company subcontracts any R&D qualifying projects, you can claim for the tax relief of 65% to the subcontractor’s payments. If your company is a subcontractor for qualifying R&D projects to a large company, you may claim in the RDEC scheme.

You cannot get tax relief from the SME scheme if you get any grants from notifiable state aids, but you can qualify for the RDEC scheme. In case you get grants and subsidies from non-notifiable state aids such as de minimis State Aid, Horizon 2020, you can be eligible for both SME and RDEC schemes.

How to claim R&D tax relief

To claim R & D relief, you first need to fill the CT600 form on which you will supply all the qualifying expenditures for innovative science and technology projects. You can claim 

14.5% payable tax credits in SME scheme. If you have qualifying R&D company for years and you didn’t apply for tax relief, then you can make a backdated claim under the anniversary of your specified filing date.

There are four stages to claim tax relief:

  • Calculate your allowable expenditure
  • Turn the allowable expenditure into a figure for R&D tax relief
  • Put the R&D tax relief into the company tax return
  • Use an online R&D Tax Credit platform such as Claimer.io

You can read our full Claimer.io review

While claiming for a relief tax, provide a short report on which you will explain how your projects fit in the definition of R&D tax relief. In your claim, focus on the uncertainties faced and their solution to complete the project. In short, provide a complete summary of your innovation and include an expense breakdown for which you want relief.

Case study:

In life and health sciences, the development of a new drug, including its phase 3 trials to increase the effectiveness and reducing the risk of disease, is an R&D qualifying project. The wages of both a scientist and research assistant can apply for this relief tax. However, any work relating to FDA approvals of medicines doesn’t qualify.

Any reverse-engineered product that is done for marketing, not covered by any intellectual property cannot qualify for relief tax credits.

Conclusion

Research and development relief tax is given to companies that want to advance in science and technology. It is an outstanding initiative for the wellbeing of any country. Not all projects can qualify under this relief tax. The UK government has set specific rules for the companies to apply. You need to fit under their definition of R&D relief credits and summarize the projects to qualify.

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