Claiming R&D relief could reduce you tax bill or even lead to a rebate, so why do so few small companies realise they could apply?
The Government’s small company Research & Development tax credits scheme is a great way for qualifying companies to either reduce their corporation tax bill, or potentially get a rebate from the taxman.
To qualify for the SME scheme a company must have less than 86m euros in annual turnover and its claim must relate to R&D that can be shown to have advanced knowledge and capability generally in an area of science or technology.
Contrary to some people’s understanding, however, the company does not have to specialise in R&D to qualify. In fact, any company could potentially qualify on a project-by-project basis.
So, how does it work? Effective relief of up to 33 pence can be claimed for every pound spent on qualifying R&D costs (see the box below for details). So, for a claim to be worthwhile it needs to have a reasonable cost base, for example, employee payroll costs and/or external subcontractors.
What costs qualify for relief?
• The employment costs of R&D staff (salary/Employers NIC/pensions) x the amount (i.e. %) of their time spent on qualifying R&D. Typically, this is the bulk of any claim
• Externally provided workers – typically these are agency staff on the payroll of the relevant agency.
• 65% x subcontracted R&D costs.
• Consumables – basically things that are used up in the R&D process.
• Qualifying directly attributable overheads/utilities.
• Software licences needed for R&D work.
What you need to know before making a claim
- The small companies’ scheme, which allows claims of up to 33 pence in the pound, is open to companies with a turnover of up to 100 million euros or a balance sheet total under 86 million euros.
- For larger companies and those excluded from the small company scheme, the Research & Development Expenditure Credit (RDEC) scheme is available, but this only offers relief of up to 8p in the pound.
- From 1st April 2023, the cost of overseas contractors will be excluded from the scheme.
- Companies with accounting periods beginning on or after 1st April 2023, who are making their first R&D claim, they must pre-notify HMRC of their intention to make a claim no later than 6 months before the financial year end. Companies already making claims will not be affected.
- Also from April 2023, all R&D claims will have to be submitted digitally.
- If you are receiving R&D grant funding, this often disqualifies you from claiming tax relief, irrespective of the size of the business. It is therefore important to get advice before accepting any offer of funding as it may be less valuable than a rebate or claim under the scheme.
In some cases, the business does not necessarily need to have started trading, as it is possible to make a claim for a “pre-trading” period, plus it may be possible to claim up to two years after the work took place.
It is, however, important to have a good supporting narrative explaining the aim of the R&D activity, setting out details of the uncertainties faced and how they were overcome.
Does R&D grant funding affect the claim?
If you receive grant funding, it is likely that your business will not be eligible for the small company scheme. You may still be able to claim RDEC (Research & Development Expenditure Credit) but this is much more limited (up to only 8p in the pound as opposed to the 33p under the small company scheme).
In fact, for some businesses the loss of potential R&D relief will outweigh the size of the grant, so it is really important to consider all the implications of any funding before you apply.
For a grant to be worthwhile it has to be above the amount of potential rebate or relief OR it must have no effect on your ability to claim under the small company scheme, which can sometimes be the case.
The grant making body’s website often tells you what the effect on an R&D claim is if a grant is received from them.
Though claims under this scheme can be complex the benefits make them highly worthwhile. So, for companies involved in ground-breaking research, and who meet the requirements of the R&D scheme, this important relief should not be overlooked.
If you think your company could be eligible for R&D tax relief you can contact the corporate tax team at Richardson Swift via hello@richardsonswift.co.uk or by calling 01225 325580, for an initial free assessment.