What are R&D tax credits?
R&D tax credits enable companies to invest more in research and development (R&D). Typically, they are designed to reduce a company’s corporation tax bill; however, those companies not in profit may be able to surrender their losses in return for a cash sum.
What constitutes an R&D project?
The umbrella term ‘R&D’ generally refers to research which directly contributes to the creation of new and innovative products, processes and services, or simply the enhancement of knowledge and understanding.
However, the project must have relevance beyond the company which is carrying out the research. If a company is simply carrying out the R&D for its own ends, it will not get money; it has to demonstrate that the new finding and/or products it delivers have wider benefit.
On the other hand, the applicant must prove the research is linked to their company. If you run a food manufacturing business, and you embark on a project about space exploration, you won’t have any joy when you come to apply for credits!
Who is eligible?
The majority of companies which receive R&D tax credits are involved in manufacturing, engineering and hi-tech industries; however, anyone who delivers original scientific or technological findings could be eligible.
Current legislation stipulates that companies must spend at least £10,000 on R&D per annum in order to qualify. However this requirement is being phased out; subject to European approval, it will be removed in next year’s Budget.
What costs can I claim for?
Broadly speaking, the costs you can claim for are as follows:
• Staff
• Managers and project leaders
• Physical materials used in the project
• Power, water and fuel used in the project
• Computer hardware, and software, used in the project
How much can I get?
Following the changes announced in the 2011 Budget, a company which successfully applies for R&D tax credits could receive up to 200% of corporation tax relief on their R&D expenditure – and this will rise to 225% in April next year.
Companies which aren’t yet making a profit can claim payable credit of up to 24% of the money they spend on their project.
What if it’s only a side project?
The amount you receive could be limited by the amount of time and effort you, and your staff, have spent on the project. If you or your employees were only partly engaged on R&D activities during the project, you can only claim for an appropriate percentage of the cost.
Furthermore, you can only apply if you’ve employed full-time staff to carry out the R&D. If you’ve used freelancers, independent contractors or work experience assistants to carry out the research, don’t waste your time – you won’t get any money!
How do I apply?
Any claims for R&D tax credits must be made in your company tax return, or amended return.
As a small business, you should put a tick in box 99 of the form to indicate the size of your company; then, put the enhanced expenditure in box 101 – this is the amount you spent on the R&D project, multiplied by 2.
You must make any claim for R&D Relief in your Company Tax Return or amended return. The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period. This figure should also be included in your calculations of the profit (Box 3) or the loss (Box 122).
And the boxes don’t stop there – you’ve also got to put the amount payable in boxes 87, 89 and 143 – and put an X in the ‘repayment due for this return period’ box, found on page 1.
It’s good practice to include a summary of the costs attributable to the R&D project, and tell HMRC why you think your project should receive credits as R&D. However neither of these are legal requirements.