How Does the UK's Research and Development Tax Incentive Scheme Work?
Given they meet the criteria, HMRC offers significant tax reliefs on qualifying costs and tax credit claims on surrenderable losses to any small or medium sized business that works on an ‘innovative’ project. Larger businesses are also able to claim relief in the form of an RDEC (Research and Development Expenditure Credit). This can be a significant benefit for companies that are investing money into innovative ventures that may come with some financial risk.
While any business has the freedom to innovate, there are limits on the type of work that are eligible for the relief. A business from any industry can do Research and Development (R&D), but the project must fall under science or technology, and it must be something that has not been possible before. This means that it can not be a project within social science or theory.
Why do companies undertake R&D?
Technological advancement has (and continues to have) a major impact on improving businesses in nearly every industry. For example, cloud accounting software, which was developed by accounting companies needing a more modern, accessible accounting solution, has led to increasingly efficient digital accounting methods that were not previously possible. This has helped many other businesses who undertake their own accounting or offer it as a service, meaning the R&D involved has benefited modern society in many ways.
What is considered as ‘innovative’?
The most important criteria for R&D projects to meet states that the project must be done with the intention of improving and modernising a process related to the company’s field, and not for selfish reasons.
To claim the relief, the company must first be able to prove to HMRC that they researched whether the proposed advance already exists. If the research turns up a solution that was created by another company, but that is not public knowledge, it is acceptable for submission, however, the R&D expenses might be significantly less, meaning a less overall tax deducted. In such cases, businesses should weigh up whether this is worth the effort.
The company must then prove that they had to overcome uncertainty. This includes providing evidence of previous theory and subsequent work done. It must be proven that there was initial uncertainty by experts in the field, and then that this effort was undertaken. Acceptable evidence includes research, testing and analysis processes, and results.
Finally, it must be shown that the project could not have been easily worked out by an existing professional in the field. Any failed past attempts would suffice. If the project has never been attempted, HMRC will need input from other experts in the field who can confirm this.
How much can a company claim?
There are two different tax reliefs that companies undertaking R&D can claim, depending on the size of the company.
Small and medium enterprises (SMEs) can deduct an extra 130% of their R&D costs from their yearly profit (plus the standard 100% deduction), while large companies can claim a 13% tax credit on their expenditure, called Research and Development Expenditure Credit (RDEC) which replaced the large company scheme.
A company is considered an SME by HMRC if it employs less than 500 staff members and sees a yearly turnover less than 100 million euros (£82.9 million), or a balance sheet worth under 86 million euros (£71.3 million).
Additionally, if an SME is making a loss but successfully claims the R&D tax relief, it can also claim tax credit up to 14.5% of their surrenderable loss. This is either in the form of a quick cash payment, or a maintained credit claimable when it is more profitable to do so.
Sherlock & Co can help
If you need advice on whether your company is eligible for the R&D tax relief, contact the expert business accountants at Sherlock & Co. We will be able to provide guidance and advice and break down the details of the R&D and tax incentive scheme and how it may help your business.