Research and development (R&D) tax credits are a valuable government tax relief for eligible UK companies that invest in innovation.

Companies that spend money developing new products or services, or enhance existing ones may be eligible for a corporation tax deduction or a cash payment from HMRC.

If your company is taking a risk by attempting to resolve scientific or technological uncertainties then you may be carrying out a qualifying activity.

However, the knowledge being sought to create these advancements must not be already in the public domain in order to make a claim.

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Activities could include:

  • Creating new products or services

  • Enhancing existing products or services

What kind of expenditure qualifies for R&D tax credits?

  • Staff costs (the portion of staff salaries relating to this activity can be claimed. This also includes employer’s NI and pension contributions)

  • Sub-contractors working on the project (only 65% of this expenditure is allowable)

  • Materials and utilities such as light/heat

  • Software

What can you not claim for?

  • Capital expenditure

  • Land

  • Patents/trademarks

  • Rent/rates

How to calculate your tax relief for R&D

1. Example One

Company A spends £100,000 on employee’s salaries who are solely working on an innovative software project.

The qualifying expenditure would be £100,000 and so the company would calculate their ‘enhanced expenditure’ as follows:

£100,000 X 230% = £230,000

2. Example Two

Company B spends £50,000 on employee salaries relating to an innovative project and £50,000 on sub-contractors who also worked on this project. The company would calculate their enhanced expenditure as follows:

Employee costs £50,000

Sub-contractors £50,000 X 65% = £32,500 (Only 65% claimable for sub-contractors)

Total qualifying expenditure: £50,000 + £32,500 = £82,500.

Enhanced expenditure = £82,500 x 230% = £189,750

How to claim your R&D tax relief

Research & Development tax relief can be claimed in two different ways:

1. Enhanced expenditure deduction

Companies can offset the enhanced expenditure amount against their corporation tax bill. This means a company with £230,000 enhanced expenditure will get corporation relief (19%) of £43,700.

2. Payable credit

Where a company has unrelieved trading losses, it may ‘surrender’ the R&D tax relief in exchange for a payable tax credit. This payable tax credit is currently 14.5%.

So a company with significant losses could claim a payment from HMRC of £33,350 on £230,000 enhanced expenditure. However, the company must be a going concern in order to claim.

It is more financially advantageous overall if a company uses their enhanced expenditure to offset
 against corporation tax relief (19%) rather than claiming a payable tax credit from HMRC (14.5%) but the company’s circumstances should of course be considered.

If the company is making a loss and the additional cash would be much more instrumental to the
 company’s success now compared with a larger tax relief later on, then a credit can be taken.

Please note - the claim is restricted to the company’s loss so the benefit of this method of claiming will be less for companies with smaller losses in comparison to their enhanced expenditure.

The Accountancy Partnership are able to claim your enhanced expenditure against your corporation tax but if you would like to claim a credit from HMRC we would have to refer you to a specialist in this area, contact details can be provided upon request.

If you have any further questions regarding your R&D tax credits simply phone 020 3355 4047 and of our friendly advisors will be happy to help.

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