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How to claim tax credits for research and development time

Businesses driving science or technology-related innovation through their projects might be able to claim corporate tax relief. Find out what the eligibility requirements are below, as well as how to claim research and development tax credits.

What are R&D tax credits?

If your business has invested money into significant research and development, you may be eligible to receive research and development tax relief. R&D tax credits are available through HMRC, allowing you to claim back a percentage of your research and development costs. This corporate tax relief is available whether or not your project was successful, provided it meets the criteria for R&D.

Projects that qualify for R&D tax relief

To qualify for R&D tax credits, the project must make an advance in the technology or science fields. The project must also be related to your company’s purpose or trade. In most cases, this will be the business’s existing trade. However, if you’re planning to launch a new endeavour based on the outcome of your R&D project, this could also qualify.

As part of your application for research and development tax credits, be prepared to explain the following to HMRC:

1. How does the project advance science and technology?

The project shouldn’t only benefit your business. A qualifying R&D project will advance the field overall, either through a new technology or process.

2. How did it overcome uncertainty?

In science and technology, uncertainty exists if an expert can’t categorically state that something is impossible or explain how it’s done. You’ll need to show that your R&D team used research, testing, and analysis procedures to overcome this uncertainty.

3. Was the result something obvious or was it truly innovative?

To qualify, the results of the project shouldn’t be something that any industry professional could easily work out. You could prove this by giving examples of other attempts to find a solution. Another option would be to have your team of professionals explain the process and difficulties involved.

What types of R&D relief are available?

The type of R&D tax credits you’re eligible for will mainly depend on the size of your company.

SME R&D relief

If you’re an SME with:

  • A turnover of under 100 million euros or balance sheet total under 86 million euros

  • Fewer than 500 staff

You could potentially qualify for SME R&D relief. This will also be dependent on whether or not you partner with other companies. For those who qualify, you can:

  • Deduct 130% of qualifying costs from yearly profit

  • Deduct the usual 100% deduction from profit, for a total of 230%

  • Claim R&D tax credits if operating at a loss, worth up to 14.5% of the loss

R&D expenditure credit

Another type of R&D tax credit is designed for larger companies. Large companies can claim the R&D expenditure credit (RDEC) of up to 13% of qualifying expenditures as of 1 April 2020.

Which costs qualify for an R&D claim?

Certain project costs qualify for research and development tax relief. These must fall within the start and end date of the project. Costs that qualify include a percentage of:

  • Employee salaries or wages

  • Employee pension fund contributions

  • Employee Class 1 National Insurance contributions

  • Costs of using subcontractors for R&D projects

  • Software licence fees

  • Consumable items like materials and utilities

  • Payments made to research volunteers

On the other hand, there are some project costs that can’t be claimed under R&D tax credits. These include:

  • Capital expenditure

  • Production and distribution of goods and services

  • Rent or rates

  • Cost of land

  • Cost of patents and trademarks

For the purposes of working out costs, you’ll need to define the start and end date of your R&D activity. This begins when you start working on the project to resolve uncertainty. The project ends when you have either solved the uncertainty or stopped working on it. R&D doesn’t cover the costs associated with production.

How to claim research and development tax credits

To get started with claiming R&D relief, you must first calculate your enhanced expenditure and enter it onto the full Company Tax Return form (CT600). This should include all eligible costs mentioned above, multiplied by 130% to find out your additional deduction amount.

The second step is to use the HMRC online service to provide all required support and documentation.

R&D relief claims can be made up to two years after the end of the related accounting period. If the claim covers multiple 12-month periods, you’ll need to submit separate claims for each accounting period.

As with all tax-related activities, be sure to read instructions carefully when filing your claim as rules change from year to year.

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