Enhanced tax relief for research and development expenditure (R&D) has been around for a number of years.
However, it is surprising how many businesses are unaware either that the relief exists, or that their business might benefit from claiming it. This is a shame because a claim for R&D tax relief can be worth as much as £260 for each £1,000 spent on qualifying activities. In addition, where a company undertakes R&D but does not have any corporation tax liability, it can receive payment of a tax credit from HMRC. The relief though does have to be claimed; it is not automatic.
We find that businesses want to save on their tax bills, but are increasingly concerned that doing so will leave them in ‘hot water’ with HMRC. R&D provides an ideal solution where it is available; not only does it reduce the tax bills, but it is also a relief that the government, and by extension HMRC actively wants taxpayers to claim. This is unlikely to change with Brexit.
The range of businesses which can qualify for this relief is much broader than is commonly acknowledged – research and development are not just carried on by people working in white coats in laboratories, though these people probably are doing R&D. By way of example of the range of businesses which can benefit, we have recently assisted with claims in the fields of bespoke manufacturing, process automation, environmental control systems and software development.
That is not to say though that every business can benefit. In particular, this relief is only available to companies (ie sole traders, partnerships and LLPs are excluded). For the relief to be available, the company needs to have incurred expenditure on a project or projects which give rise to:
- An advance in overall science or technology
- Which has involved the resolution of technical uncertainties, and
- Where the advance could not have been readily ascertained by competent professionals.
In essence then, if a company has technologies, processes or manufacturing techniques which its competitors do not, or has developed software, it is worth exploring whether an R&D claim might be possible.
For small and medium-sized companies (which in practice are the vast majority), relief is targeted at R&D which a company has undertaken in its own right. Typically this means that the company needs to have borne the risks associated with the project. In limited circumstances, a company may also be able to claim for R&D subcontracted to it, but where such a claim is possible, the relief is much less generous at around £90 per £1000 of spend.
Where a company makes a claim for R&D expenditure, HMRC will normally expect a report in support of the claim to accompany the company’s tax return. It is this report which explains what has been done and supports the assertion that the activities are R&D and so qualify for relief. It is therefore important that the report is carefully considered and written by someone who has experience of the subtleties of what does and what doesn’t constitute R&D from a tax perspective.
Once it has been established that there is a claim for R&D, tax relief is available for the majority of costs associated with the qualifying projects or activities. This includes wages and salaries, materials consumed in undertaking R&D and apportionment of some overheads. The claim can also include some of the costs of subcontractors. Although the calculation of the value of a claim is on one level mathematical, there are a number of nuances to be aware of and it is often necessary to make appropriate estimates and approximations. This means an element of judgement is also required in completing this part of the claim.
In conclusion, R&D has a much broader application than is often realised, but as it is a complex area, it should always be considered carefully.
Please feel free to contact Chris Bentley if you think you may have a potential R&D claim and would like to explore the possibility of claiming relief further. Chris can be contacted at 01625 669669 or CBentley@harts-ltd.com.