Research and Development Tax Relief

Research and development tax relief was invented in 2000 to encourage UK limited companies to invest in achieving advances in science and technology. R&D tax relief allows companies to reduce their tax liabilities, even businesses can receive payable credit through this scheme. Companies that spend money on new technology, and try to make innovations on existing ones, can qualify for R&D. But only some research projects can benefit from the UK's government tax relief policy.

R&D Tax Relief Eligibility Criteria

To qualify for tax relief, the project strives to make headways in science and technology. The project should be associated with your company. The program must improve existing technology, product, service, and process. It intends to conduct research and generates new ways to overcome uncertainties. According to the UK government explanation, only those projects qualify for R&D tax relief that:

  • Attempt to make innovation in any field of science and technology. Work that uses science and technology doesn't qualify for R&D unless that particular work makes advancements in the field of science and technology.
  • A project that improves an existing product, process, or service, and improves overall knowledge and capability. 
  • If a project fails to acquire its target, still, R&D will be available for this project. 
  • If an advance has already been made in the field of science and technology but a company works on it to get better facts, it will be considered an advance. 
  • Scientific uncertainty exists when there is a doubt about whether it is scientifically possible or not. You are not sure if you can overcome these uncertainties or not. Scientific and technical uncertainties that can be solved with help of professionals are not called uncertainties. 
  • Planning and activities that directly participate to overcome scientific and technical uncertainty are a part of research & development. 

Types of Research and Development Tax Relief

There are two different classifications of R&D tax relief. Which type of scheme a company should follow depends on its size.

  1. SME (Small and Medium Enterprises) R&D Scheme 
  2. RDEC (Research and Development Enterprises Credit)

SMEs R&D Scheme

SMEs means small and medium enterprises. SMEs companies have fewer than 500 workers and with a turnover of less than £ 86 million. however, if your company has external investors, it can affect your SME R&D scheme status. If a research project of your company already getting some grant, this project can not fall into the R&D scheme.

Corporations above this margin are large firms. Small companies claim research and development tax credits. SME R&D tax permits companies to:

  • Deduct 230% of your qualifying cost against your taxable revenue. 
  • The loss-making company can claim payable credit worth up to 14.5% of the surrender-able loss. 

A company should fall under the criteria of the SME R&D scheme to claim this relief. 

RDEC Scheme

Large businesses that can't fall under the SME R&D scheme, can claim fewer beneficial Research and Development enterprises credit. Small businesses also claim the RDEC scheme if their businesses are not eligible for the SME R&D scheme. The new RDEC rate is 13%. It was increased from 12% to 13%. 

An RDEC credit is calculated at 13% of your company's qualifying R&D expenses. If a company is making a profit and loss, it can claim RDEC going back two full monetary years. 

What Cost can Qualify for R&D Tax Relief

Most of the costs that a company spends on research and development are qualified for R&D tax relief. For example 

  • The salaries and wages of the Employees who are working on a research project are eligible for tax relief. National insurance and pension costs are also included in it. 
  • Software fee that is obtained for research purposes is entitled to R&D tax relief. 
  • The cost of consumable items like equipment, materials, water, and fuel qualifies for relief. 
  • If an employee spends only a part of his working time on an R&D research project, the salary of that part of the time qualifies. 
  • A company can claim payment made to volunteers for a pharmaceutical project. 

Some costs do not qualify for relief. The cost of land, trademark, patent, capital expenditures, rent rates, and production distribution of goods and services do not qualify for R&D relief cost. 

How to Claim R&D tax relief

R&D tax relief rewards UK companies for performing research according to HMRC criteria. Every year more than 60k corporations claim Research & development tax relief schemes. For research and development tax relief, a company must test its eligibility first.  A corporation files its R&D claim by itself.  However, Firms can hire an experienced person to get it filed for themselves. If a company wants to do it by itself, it is advised to read the Government guidelines about R&D claims. The company should complete its work before filing a claim because if anything wrong happens, the firm will have to face an HMRC inquiry. One mistake can delay the process by up to six months. It's better to call an R&D tax credit expert. 

  • Before starting, a firm needs to figure out what type of project will qualify for R&D claims.
  • A company is required to decide what type of R&D scheme the company will apply for. The corporation will decide according to its size.
  • A corporation is required to explain its narrative to HMRC technically and scientifically.
  • A good financial record helps a company to understand what costs are eligible for relief. 
  • After completing your financial calculation and building your technical narrative, it's time to file an R&D claim to HMRC. 

Once the process is done, the waiting process will start. HMRC inspector will investigate your monetary calculation and technical & scientific narrative. If HMRC approves your claims, they will write to you about verifying your claims.  Now, they will proceed further to approve your cash credit and tax deduction, within 20 to 100 days they approve credit claims.