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How To Claim Corporation Tax Relief Costs On R&D If You’re An SME

As the UK continues to become a global hub for innovation, the government has implemented a range of financial incentives to encourage businesses to undertake research and development (R&D) activities. For example, the R&D tax credit system is designed specifically for Small and Medium-sized Enterprises (SMEs) and aims to lessen the financial burden of innovation costs. If you’re an SME working on projects in science and technology, it’s wise to take time to explore how to navigate this benefit to maximise your corporation tax relief to ensure you’re not paying more tax than you need to.

What is R&D Corporation Tax Relief for SMEs?

Before diving into the claiming process, it’s important to understand the tax relief itself. 

R&D Corporation Tax Relief allows SMEs to deduct an extra 86% of their qualifying R&D costs from their yearly profit. This is on top of the usual 100% deduction, making a total potential deduction of 186%.

For SMEs operating at a loss, there’s an option to claim a tax credit worth up to 10% of the surrenderable loss. In essence, it can provide a cash injection when the company needs it most.

Do You Qualify?

R&D tax relief is there to support companies working on innovative projects in science and technology. With this in mind, you can’t claim if the advance is in the arts, humanities or social sciences.

To claim R&D tax relief, you must be a UK-based SME with:

  • Fewer than 500 staff.
  • A turnover of under €100m or a balance sheet total under €86m.

What’s more, the R&D project should aim to achieve an advancement in science or technology, and you’ll need to show how a project had to or tried to overcome scientific or technological uncertainty.

Steps to Claim Corporation Tax Relief on R&D for SMEs

  1. Maintain Accurate Records: Ensure you have robust records detailing all R&D activities and associated costs. This will help calculate your R&D expenditure and provide evidence if HMRC ever asks to see it.
  1. Identify Qualifying R&D Activities: This is a nuanced process, and not all activities related to R&D might qualify. Generally, tasks directly contributing to seeking an advancement in science or technology, or supporting such activities, can be included.
  1. Define the Qualifying Expenses: These can include:
    • Staff salaries, wages, and NICs.
    • Certain subcontractor costs.
    • Materials and consumables used up in R&D processes.
    • Some types of software.
    • Data licence costs and cloud computing costs (for accounting periods beginning on or after 1 April 2023)
    • Utilities, like power, water and fuel used in R&D.

Remember, the goal here is to focus on the tax relief and not the expenses per se. Therefore, make sure you’re meticulous in identifying what counts towards the relief. Find out more about which costs qualify here.

  1. Calculate the Enhanced Expenditure

Once you’ve identified the qualifying activities and expenses, there are a few calculations to do before preparing and submitting your claim, namely:

  1. Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost.
  2. Add all the costs together.
  3. Multiplying the figure by 86%
  4. Add this to the original R&D expenditure figure.
  1. Before Submit a Claim Notification

From the 1st of April 2023, you might need to submit a claim notification form to let HMRC know your claim is coming. This is usually if you’re claiming for the first time or your last claim was made more than three years ago. Find out what you need to provide here.

  1. Submit a Claim Notification

From the 8th of August 2023, you must submit an additional information form to support your claim before you submit your company’s Corporation Tax Return. Failing to do so will result in your claim being removed. Find out more here.

  1. Prepare and Submit Your CT600: Your claim for R&D tax relief is made in your Company Tax Return by:
  • completing the single iXBRL computations file
  • putting an ‘X’ in box 656 to say you’ve submitted the claim notification form
  • putting an ‘X’ in box 657 to say you’ve submitted the additional information form
  • completing the supplementary form CT600L, if you’re claiming a payable tax credit or R&D expenditure credit
  1. Claim within Time Limits: Make your R&D tax relief claim within two years of the end of the accounting period the R&D expenditure was incurred. Also note that if your tax relief claim covers more than 12 months, you must submit a separate claim for each accounting period.

A Few Extra Considerations

When it comes to working out the financials for R&D costs and making a claim, there are a couple more things to consider.

External Investors: If your company has external investors, the staff, turnover, and balance sheets of any linked or partner enterprises may need to be included. Find out more here. 

R&D Tax Relief Advance Assurance: If you’re making your first claim for tax relief as an SME, you may be able to apply for advance assurance for your first three accounting periods. It’s a voluntary scheme to give assurance your claims will be processed without further enquiry from HMRC and is there to help businesses in their early phases of growth. Find out more here.

Final Thoughts

R&D Corporation Tax Relief offers a significant financial benefit to SMEs driving innovation in the UK. However, navigating the relief process can be intricate. By keeping comprehensive records, understanding the specifics of qualifying costs, and seeking expert advice when needed, your company can harness the full power of this incentive.

At Norwich Accountancy, we pride ourselves on guiding SMEs through the complexities of the tax landscape, helping you to capitalise on every available benefit. If you have questions or need assistance with your R&D tax relief claim, don’t hesitate to reach out. 

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Guidance on Claiming Research and Development (R&D) Tax Reliefs

The UK Government, with its strong inclination towards fostering innovation, offers lucrative tax incentives to businesses that engage in research and development (R&D) projects in science and technology. For businesses not already capitalising on these reliefs, understanding them can unlock significant savings, improving cash flow and encouraging further investment in innovation.

In this guide, we’ll demystify the process and provide a broad overview of the R&D tax relief scheme, helping you determine if your business is eligible and understand the claiming process.

What are R&D Tax Reliefs?

At its core, R&D tax reliefs allow companies to reduce their Corporation Tax or claim cash credits based on their R&D expenses. The UK provides two main R&D reliefs:

  • SME R&D Relief

Suitable for small and medium-sized enterprises (SMEs) with <500 staff, <100 million euros turnover, or <86 million euros balance sheet. For year ends starting on or after the 1st of April 2023, businesses can deduct an extra 86% of their qualifying costs from their yearly profit, alongside the standard 100% deduction, totalling a 186% deduction. Loss-making firms can also get a tax credit of up to 10% of the loss. 

  • RDEC (Research and Development Expenditure Credit)

For larger companies and SMEs that have been subcontracted R&D work by a large company. The credit rate is 13% for expenses from 1 April 2020-1 March 2023 and 20% from 1 April 2023 onwards.

Find more information on converting tax relief into payable tax credits here.

Are You Eligible?

The notion of R&D means more than just white-lab-coat activities. Anything from developing new processes, products, or services to modifying existing ones can qualify if they tackle scientific or technological uncertainties.

Your UK-based limited company can claim R&D tax reliefs if: 

  • It incurs R&D expenses linked to your trade or potential trade. 
  • The project aims for scientific or technological advancement.

The Project

To claim R&D tax relief, simply stating you’ve done a project isn’t enough. It must meet HMRC’s R&D definitions, and you’ll need to demonstrate how the project covers:

  1. Advances in the Field: Your project should aim for an overall sector advancement, not just something new for your business. If another company has developed something similar but it’s not public knowledge, it can still count as an ‘advance’.
  2. Scientific or Technological Uncertainty: Your project must tackle issues that aren’t easily solvable by experts in the field. Readily available or easy solutions don’t qualify.
  3. Efforts to Overcome Uncertainty: Detail your research, tests, and efforts to address challenges, highlighting both successes and setbacks and showing genuine efforts to resolve challenges.
  4. Why Experts Couldn’t Solve It: Showcase that even seasoned professionals found the issues complex. Reference others’ failed attempts and your team’s expertise.

Qualifying Costs

Not all expenses qualify for R&D tax reliefs. Here’s a quick run-through of what generally qualifies:

  • Direct Staff Costs: Salaries, wages, and some other related costs of employees involved in R&D activities.
  • Externally Provided Workers: Costs associated with hiring freelancers, staff providers, or external agencies for R&D.
  • Subcontracted R&D Expenditure: Only for SMEs, with restrictions if the work is subcontracted to connected parties.
  • Consumables: Materials and utilities consumed directly in the R&D process.
  • Software: Software used exclusively in R&D activities.

Capital expenditure, travel, rent, and rates typically don’t qualify, so it’s important to consider what does and doesn’t qualify as an eligible R&D expense.

Find out more about what you can and can’t claim here.

Making a Claim

Here’s a step-by-step guide to making an R&D tax relief claim:

  • Identify R&D Projects: Understand which of your projects sought to achieve an advance in science or technology and faced uncertainties that competent professionals couldn’t resolve easily.
  • Calculate Expenditure: Tally up all the qualifying costs associated with those projects during the tax year.
  • Documentation: Maintain a robust documentation process. From project reports to financial records, these documents can be invaluable if HMRC wishes to review your claim.
  • Submit Your Claim: R&D tax relief claims are made in your Corporation Tax Return or amended return. Make sure to complete the full R&D section, including detailed project narratives, and annex the required CT600L supplementary pages. 
  • Deadline: You have two years from the end of the accounting period in which the R&D expenditure occurred to make your claim.

Common Pitfalls and How to Avoid Them

  • Under-claiming: Many companies either overlook or are unaware of the full range of costs that can qualify. Regularly review potential R&D activities and check what’s claimable.
  • Poor Record-Keeping: A lack of evidence or poor documentation can jeopardise your claim. Implement a system to document all R&D activities, decisions, and expenditures.
  • Not Meeting the Definition: Remember, it’s not enough for a project to be innovative. It must seek scientific or technological advancement and tackle uncertainties. Ensure that your project documentation clearly articulates this.

Potential to Propel Innovation

R&D tax reliefs are not just for tech giants or pharmaceutical titans. They cater to businesses of all sizes across numerous sectors. With the potential to recover a substantial portion of your R&D expenditure, understanding and leveraging these reliefs can be transformative for your company and propel scientific and technological innovation.

Navigating the process can be tricky, but that’s where we come in. Our team is here to clear up the confusion and handle the nitty-gritty details for you. So, if you’re feeling even a little overwhelmed or have a question, please don’t hesitate to get in touch. We’re here to make the world of tax simpler for you and, as always, help you make the most of the reliefs available.