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R&D tax credits: what you need to know

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Research and development tax credits are a generous company tax relief that can either reduce a company’s tax liability or provide a sizeable cash rebate. 

As such, they can represent an alternative, and often vital, source of funding for entrepreneurial companies. The amount of R&D relief claimed since its inception in 2000 is well over £7bn, but many companies are still missing out.

Who qualifies?
To be able to make a claim a company needs to be undertaking qualifying R&D. The benefits are not only available to cutting edge “blue sky” research companies – it’s not just about white coats and test tubes.

R&D projects must look to seek the “resolution of scientific and/or technical uncertainty”, but in our experience companies do not always recognise when uncertainty exists or find it easy to define specific projects. That is why expert advice is crucial.

Claims are made across a diverse range of sectors. In the biosciences, for example, claims are common. They are perhaps harder to spot in a manufacturing or engineering context. 

If you are a window manufacturer trying to increase the thermal qualities of your windows, a food manufacturer trying to increase the shelf-life of your product, or a electronics company trying to enhance chip data storage capabilities you may be one of the wide range of companies that can benefit. Farmers or market gardeners seeking to develop hybrid crops have also been known to claim relief.

There is also a common myth that companies carrying out software development find it hard to qualify. This is not, however, the case. Whether you licence software, provide software as a service or even write software for your own internal use we would urge you to check your eligibility to claim.

How does the relief work?
There are two schemes for claiming relief depending on the size of the company. For SMEs, the system works by giving a “super” tax deduction against taxable profits on qualifying R&D costs. 

A tax-paying company spending £100,000 could save tax of in the region of £28,000. For larger companies, or companies carrying out subcontracting activities, the relief is less generous but still worthwhile.

For companies where the extra deduction creates or increases a tax loss it may be possible to surrender the loss and receive a cash repayment instead. This is particularly valuable where a company is “pre-revenue”, providing an often much needed additional revenue stream.

What costs qualify?
Qualifying R&D costs may include:

  • Employment costs – salary, employers NICs and pension contributions; 
  • Consumables – heat, light, power, chemicals, prototypes etc; 
  • Software; 
  • Sub-contractor costs; and
  • Costs relating to qualifying indirect activities, for example, admin, functions and training.

Can I get R&D tax credits as well as R&D grants?
The rules in this area are complex, especially if the grant is notified state aid under the EU rules. However, it is normally possible to benefit for both, even if the amount claimable as R&D tax credits is less than might otherwise have been the case. The secret is to understand the interaction of the two schemes in advance in order to maximise the combined benefit.

How do I make a claim?
The claim is made on the company’s annual tax return, but the most successful claims attach detailed calculations and a narrative explanation of the R&D. Although daunting, it is usually manageable with the assistance of advisers.

It is also often possible to make a retrospective claim. For example, if you have a March year-end you have until 31 March 2014 to make a claim for 31 March 2012, and are well within time for the year to 31 March 2013.

HMRC is eager for companies to claim and has set up specialist research and development units to handle enquiries. It is important that you appoint advisers who work with these specialists and have the experience of submitting multiple claims.

Sharon Bedford, who has helped companies claim R&D tax credits on upwards of £100m of expenditure so far, is a partner and business tax expert at James Cowper.

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