Not sure where to start with claiming tax back for research and development (R&D)? Start here. This is my introduction guide to R&D tax credit claims.
R&D tax credits are one of the UK’s least claimed tax breaks, with less than 10% of eligible British businesses making a claim.
The reasons for that are many and varied – but so are the benefits of a potential claim. Especially when you consider that the average successful SME R&D tax credits claim is around £60,000 per year!
If you do decide to make an R&D tax credits claim – well, good on you. It’s well worth doing. Having said that, the process itself can be long and involved, with lots of specialist terminology to wade through and understand. You might decide working with an experienced team like ours is the way to go. Or you may want to look into it yourself before choosing one way or the other.
With that in mind, my guide to fully understanding R&D tax credit claims will help you make that decision.
Why should you make an R&D tax credits claim?
In short, because the numbers make it too appealing not to.
Depending on the size of your company, the sector and its turnover, this is how much of your R&D costs you could expect to see refunded:
- Large company*: around 10%
- Loss-making SMEs: up to 33%
- Breaking-even SMEs: 15-33%
- Profitable SMEs: up to 25%
For more detail on this, see the tier tables on my blog post ‘How R&D Tax Credits Can Help You Save Money During COVID (and Beyond!)’
*Over 500 employees, £100million turnover or £86million profit
What qualifies you to claim R&D tax credits?
HMRC’s Guidelines on the Meaning of Research and Development for Tax Purposes are lengthy and highly detailed. They can be split into two areas:
To qualify for an R&D tax credits claim, you need to have a UK-based company that is registered for Corporation Tax and has done projects with some sort of technical innovation. You can also claim back for the two previous accounting periods prior to the current one in the following areas:
- Salaries of staff employed on the relevant projects that qualify as research, development or similar. This can be in-house employees, consultants and contractors, but you must attribute an accurate percentage of their costed time to these projects in a way you can substantiate
- Fees for subcontractors who contributed to the project
- Software development and licenses needed for the project
- Materials and consumables used during the R&D process.
You’re also likely to be eligible if your R&D is designed to produce an innovation which significantly advances the field of science or technology.
That could mean researching something science-based like a vaccine (as is the ‘traditional’ interpretation of the term ‘R&D’). Or it could mean building a new tech platform to manage or solve a large-scale logistical problem, like retail order fulfilment and tracking, or high-volume data sorting. Equally it can apply to developing new products, recipes or flavours as in the food and beverage sector. The scope is really wide and working with a specialist company will ensure that you make a correct and optimised claim.
The greater the problem, and the more complex and original the solution, the more likely your R&D tax credits claim will be valid. However, it also applies to small scale problems with some form of technical innovation to your company or sector such as improving production or manufacturing line performance.
R&D tax credits: the full guide to submitting your claim
So you’ve looked at the numbers and decided to make a claim. Then you’ve done your research to make sure your project qualifies. The next step is proving it to HMRC.
There are three parts to this process.
Fill out the CT600
In order to file a Company Tax Return with HMRC, companies must fill in the CT600 form. Included in that is a section for R&D tax credits. Filling in the CT600 can be a long and complicated process – as detailed in HMRC’s official Company Tax Return Guide. This is one area where help from an experienced financial professional well-versed in R&D tax credits can be invaluable.
Another area where having professional help can be a huge time-saver is creating the document that details your R&D claim.
This document is called a technical narrative, and the best person to write it is whoever was most involved with the R&D side of the project(s) in question.
Your technical narrative should be no longer than five A4 pages (HMRC inspectors have a limited amount of time for each claim), and ideally cover no more than three projects you’re claiming R&D tax credits for. (You can claim for a maximum of 10 projects covering 50% or more of your qualifying R&D costs, but this becomes exceedingly complicated).
In terms of detail, cover as many of the following areas as possible:
- Project dates
- Summary of your project(s) and the end product’s market position relative to others in the field. (This explains to HMRC why the project is innovative and therefore qualifies for an R&D claim)
- Technical design challenges faced
- Tools and software used
- Solutions created and how they were implemented.
In terms of the actual writing, make sure to speak from a technical standpoint (rather than a managerial one), matching up R&D actions and data with their equivalent costs. Your aim should be to create a document that’s easy for HMRC inspectors to follow, giving them all of the information needed in as short a space as possible.
The third area where outsourced R&D expertise can save you time, effort and help lead to a successful R&D claim is in assembling a table of your financial calculations.
There are eight costs eligible to claim back under R&D tax credits:
- Employee costs*
- Contractor costs*
- Subcontractor costs
- Consumables (like material costs, and utilities like water)
- Clinical trial payments to volunteers
- Independent research contributions.
*Can include travel and subsistence
This guide from HMRC is an excellent place to start when understanding the ins and outs of these different areas.
Once you’ve filed your return
After you’ve submitted your claim, it will go to an R&D unit within HMRC, whose inspectors will assess it in detail. If they accept it, you could have your R&D tax credit repayment within two to eight weeks.
The good news is that assuming your claim is well prepared, even if they don’t accept it immediately, they are unlikely to reject it outright. Instead, they’re more likely to contact you with further questions, giving you a chance to clarify details and further substantiate your claim to an R&D refund.
Need help with your R&D tax credits claim?
As this is a starter’s guide to R&D tax credits, I’ve stopped short of going into every single detail which might affect a claim. This includes the PAYE cap, which is designed to prevent abuse of R&D tax relief for SMEs and takes effect in April 2021.
In truth, however, R&D tax credits claims are a very specialised area – one that even most accredited accountants and in-house finance departments are ill-prepared to tackle comprehensively. This guide will help you make a claim yourself, but your chances of making a successful one increase immeasurably when you enlist the help of an expert.
If having that expertise on the fine detail of R&D tax credits sounds like a good idea, please get in touch. I’ll be happy to talk through how I can assist you in making a successful R&D claim.