A few weeks ago, a blog on this site referred to the amazing work that Arup has done in developing bricks and construction materials from foodstuffs. As a classic example of a company using Research and Development (R&D) to develop an existing process and make a substantial improvement it’s hard to beat. But did you know that not only does R&D make a major difference to the ways in which we develop, work and use materials and technology, it can also have substantial tax benefits…?
R&D Tax Relief is available for more companies than you may expect and can result in significant tax savings and refunds for successful claims*. In other words, the answer to our question above is yes, although we acknowledge that not everyone will qualify. However, for directors of any company, whether start-ups or more established firms, it’s worth finding out more. To know if it is right for your company, you should consider the following.
What Qualifies as R&D?
HMRC guidance states that a company can claim “R&D tax relief if a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”. In simple terms, if a company was not sure if something was possible and carried out work to see if it could be done, then this might qualify as R&D.
The most relevant example that HMRC give in their guidance of a qualifying R&D project is one which “makes an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes”.
To qualify under this definition, it is necessary to demonstrate that what has taken place incorporates technology or a scientific advance that is more than a minor improvement on what is already available, in that particular field. An important question to ask is, would a professional in your field acknowledge the improvement as genuine and non-trivial?
This might seem quite challenging but in most cases it is simply a case of properly documenting what was done by the company to achieve the advance.
One point to be aware of is that HMRC do not consider improvements arising from adapting existing technology and deploying it in a new context, with only minor changes, as qualifying.
Using these criteria, you will need to be able to explain the advances in a report submitted to HMRC as part of the claim. Generally, the report would be expected to document the following:
What can be claimed?
The main areas that are likely to qualify are:
Where an employee was only partially involved in R&D work, it is possible to claim a percentage of their costs.
Some expenses are difficult to directly allocate, such as utilities, between R&D work and the general trade, so HMRC allow for reasonable apportionments.
Is It Worth It?
Once all of the qualifying expenditure has been identified, there are two ways in which the company can get relief:
The first of these is through an additional tax deduction. All qualifying expenditure is enhanced by 230% in order to reduce the company’s taxable profits for the year resulting in a significant corporation tax saving.
For example, if a company had qualifying expenditure of £100,000, this would be enhanced to £230,000. As £100,000 is already included in the company’s expenses, the extra reduction in taxable profits is £130,000. At current tax rates (19%), that is a saving of £24,700.
Alternatively, if the company has made a loss it can claim an actual tax repayment at a rate of 14.5%. However, by choosing to receive a tax refund, the company surrenders its taxable losses.
Where the company has made a profit, but due to the enhanced expenditure has made a loss for tax purposes, it is possible to combine these two reliefs. Under this scenario, the company would get full tax relief for the expenditure required to reduce the company’s profits to nil and be able to claim a tax credit repayment on the balance.
The deadline for making an R&D claim is 2 years after the end of the relevant corporation tax period. These deadlines are strictly applied by HMRC.
Stewart McKinnon, Director, M&S Accountancy and Taxation Ltd
* In the year to 31 October 2017, some of our clients have claimed R&D tax credits amounting to just under £2 million.