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
- 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.
- 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.
- 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.
- 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:
- Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost.
- Add all the costs together.
- Multiplying the figure by 86%
- Add this to the original R&D expenditure figure.
- 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.
- 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.
- 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
- 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.
