Carrying out research and development (R&D) can be an expensive part of developing your product/service and growing your business.
So, finding a way to claim back tax against your R&D costs is a sensible way to reduce your costs and free up more cash for growth investment.
Expenditure on your R&D can be claimed against tax at a rate of up to 230% of the actual costs for SMEs.
If your company is loss-making (and therefore has no tax liability) then a payable tax credit can be claimed.
🥼 Is my company eligible for the relief?
Your company must have:
- Less than 500 employees, and either
- Turnover below EUR100 million, or
- Assets below EUR86 million.
Where you have qualifying expenditure that’s been incurred on R&D projects, allowable costs are increased by an additional 130% for tax purposes.
So, for every £100 spent, £230 can be deducted from your profits when calculating tax – a helpful relief against your tax costs.
🤔 How does the relief work?
The project you’re working on must be more than just applying existing solutions to a routine problem.
The BEIS guidelines say that, for tax purposes, an R&D project is one that seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty.
The knowledge being sought must not be already available in the public domain.
It’s not just restricted to activities carried out by scientists in lab coats and can include things like developing packaging to improve the shelf-life of perishable goods or creation of software for sale or internal use.
The guidelines include work on both products and services for sale and developing equipment and processes for internal use.
It doesn’t cover the cost of projects where you are carrying out R&D work as a chargeable service to your clients, as that is seen as just normal cost of sales.
The costs to use in calculating the claim include salaries of staff working on, or supporting, the project (pro-rata, if not wholly involved).
It also includes the associated Employer NI and pension contributions for these employees, plus the costs of software, materials consumed and an appropriate share of the utility bills.
Where you subcontract part, or all, of the work to a third-party, 65% of those charges go into the calculations.
To claim the allowance or tax credit you will need to provide a report explaining what scientific or technical uncertainty you were trying to overcome.
You also need to explain how your project attempted to resolve it and why it couldn’t be easily worked out by a professional working in the specific field or sector.
The project doesn’t have to be successful to qualify for the relief.
💷 Tax Savings
Using the current 19% corporation tax rate, every £1,000 of qualifying expenditure will result in a tax saving of £437.
If you’re making a loss, you can opt to surrender it for a payable tax credit of 14.5% of the loss – £333.50 in this case.