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R&D Tax Credits Explained

Since 2000 there have been 240,000 successful Research and Development (R&D) Tax Credit claims.

Over £21.4bn of R&D Tax Credit relief has been claimed!
Whatever industry sector you are in there is a good chance that some of the activities that you carry out could be eligible for R&D Tax Credits.

R&D Tax Credits Explained

There are still far too many businesses engaged in R&D, that are not benefitting from the relief - it is estimated that around 75% of businesses who are eligible are not claiming.

Background

R&D tax credit were first introduced by the Labour Government in 2000. These were designed to encourage businesses to invest in developing ‘new’ or ‘improved’ products. We can see from recently published HMRC statistics, that since 2000, there have been over 240,000 successful claims. As a result, over £21.4 billion of R&D Tax Credit relief has been claimed.

Many companies are put off by the words ‘Research and Development’. They often interpret the phrase as meaning that they have to be a research company, or maintain a large R&D team. In reality, if you innovate and improve the way something works in your business and the outcome lacked ‘certainty’ from the start, you may qualify.

Does your business qualify?

Your business has to be a limited company, subject to UK Corporation Tax and have invested money in R&D. If you fulfil this criteria there are two questions to ask to establish if your activities qualify for R&D tax credit relief:
If you are still unsure all it generally takes is a five minute phone call to the Fiscale team and we will be able to advise you either way. We have the expertise to quickly understand your business and know whether your activities will qualify.
If in our opinion your business does qualify, we work with you to substantiate the figures, we then prepare a report and we handle the submission of the claim and any communication with HMRC. We have a 100% success rate, so we are pretty good when it comes to assessing eligibility.

Step By Step

The process for applying for R&D Tax Relief

Assessment

We establish if the research and development that you are undertaking, meets the criteria as set out by HMRC. This is usually done over the telephone, followed by a face-to-face meeting. This is to ensure that you are eligible and if so, we will then start the claims process.

Technical meeting

Following the initial meeting to establish eligibility, we will then arrange a follow up to get to know (and understand) the work that you are undertaking. Typically, this meeting takes two hours and involves going though potentially qualifying projects in detail. At this meeting we will talk to the members of your team who are involved in the R&D, along with your financial team. We will also outline what is involved in processing a claim and the level of input required by your team.

Draft report

As a result of the in depth technical meeting, we are then able to draft a report that is based on our discussions and all of the information that you have provided. We will be looking at every angle of your R&D, to ensure that we maximise the value of your claim.

Submission

Once the report has been agreed by you, we then submit it to HMRC and deal directly with them on your behalf. You have the peace of mind that the report will be an accurate representation of your activities. We will also ensure that it is presented in a way that meets the requirements of HMRC.

Review

Once the claim has been made, we will review your systems to help identify any areas of record keeping to support future claims. As a result, all future claims can be streamlined, making the process more straightforward.

A statutory tax relief written into law

There really is no catch. R&D tax credit is not “too good to be true”. It is definitely not “dodgy” or a scam. It is also not used as an excuse for HMRC to initiate enquiries into a company’s financial affairs.

Background

The bottom line is that by incentivising businesses to invest more in R&D the UK economy benefits. For every £1 of relief given back to SMEs and large companies the government have calculated that they should receive a return on investment of between £1.53 and £2.35. Read the HMRC – Evaluation of Research and Development Tax Credit report for more details!

What Qualifies As R&D?

What Qualifies as R&D? This is one of the most common questions that we're asked. Luckily, the legislation is broadly written to include many types of activitiy - we explore it in more detail below.

The Benefits For Business

The R&D tax credit initiative makes economic sense for the government, which is why it has been supported and improved since 2000 by successive governments. Claiming R&D tax credit also makes economic sense for eligible businesses.

Reduce tax liability

For profit making SMEs, a reduction of the Corporation Tax bill

Profit offsetting

For loss making SMEs, an opportunity to offset the R&D relief against profits

Improved accounting

Improvement in systems during a detailed analysis of activities and costs

Future innovation

R&D tax credits help fuel motivation for further innovation

Get ahead

Increased efficiency and innovation help a business to enhance its competitive edge

Giving back

R&D tax credits allow companies to make positive contributions to UK Plc.

How do R&D tax credits work?

R&D tax credits work by reducing a company’s tax bill by an amount equal to a multiple of its allowable R&D expenditure.
The tax credit can either be used to offset a tax bill, or taken as cash depending on whether your business is currently profitable. SMEs can claim up to 33% off the money they have invested in eligible R&D and Large Companies can claim up to 12%. The regulations allow for a claim to be submitted for the current financial year, plus two previous financial years. Claims can be made at any stage of the financial year, not just at year end.
The financial benefit in the first instance can be significant. At Fiscale the average value of a first claim is £67,000. The relief is tax free and there are no limitations as to how it can be used. Our clients have reinvested in future R&D, purchased additional equipment, hired new staff or paid out additional dividends.

Large companies

If you are a Large Company and you are involved with developing new products or improving existing products you are probably undertaking research and development (R&D). If your R&D satisfies certain criteria you could be eligible for tax relief through the Research and Development Expenditure Credit (RDEC) Scheme.


Small and Medium Sized Enterprizes

If you are an SME and your company is involved with developing new products or improving existing products you are probably undertaking research and development (R&D). If your R&D satisfies certain criteria you could be eligible for tax relief through R&D tax credit.


The Small and Medium sized Enterprise Scheme

Under the SME scheme, the company receives a ‘super deduction’ of 230% of the qualifying expenditure.

For example, if a company spends £75,000 on R&D it will receive a tax deduction of £172,500 at a tax rate of 19% this equates to an extra tax saving of £32,775

If the company is not currently paying tax, the enhanced expenditure can be surrendered for cash at a rate of 14.5%. By using the example above, a cash payment of £25,012 could be due. Further information on the SME scheme can be found on the SME page.

Research and Development Expenditure credit (RDEC)

The Research and Development Expenditure credit (RDEC) replaced the Large Company Scheme from 1st April 2016.

The RDEC scheme is available to any company that does not qualify for the SME scheme. The reason you may not qualify for the SME scheme could be due to the company size, or if you are a subcontractor to a large company, or if you have received certain grants.

Under the RDEC scheme a company will be able to claim a credit of 12% of the qualifying expenditure after allowing for set offs against any corporation tax liability. The credit can be used against future tax liabilities, surrendered for cash or a combination of the two. The actual value of the RDEC tax credit, after corporation tax is 9.7% of qualifying R&D expenditure. The rate was increased from 11% of 12% in the Autumn Budget of 2017 and the new rate came into effect from 1st January 2018. For a more detailed explanation of the RDEC scheme visit the Large Company page.

Do You Think You May Be Eligible?
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