How Does R&D Tax Credit Work?

How Does R&D Tax Credit Work?

Veritas Noble works with businesses all over the UK to help them claim R&D tax credits. Our expertise in traditional business sectors sets us apart from many businesses that may offer to help your company with an R&D tax credit claim.

Your business has a reputation for innovation. That innovation cannot occur without a substantial investment on your part in research and development. These are the processes that keep you ahead of the curve and help you to blaze a trail within your industry, pushing the envelope of what’s possible in your field. Still, investing sufficiently in R&D can place a serious squeeze in your cash flow and impinge on your short term profitability.

The good news is that you can be both innovative and profitable with a little help from the government. This comes in the form of R&D Tax Credits. Here we’ll explain how they work, whether your business qualifies and what you can claim for.

R&D Tax Credits at a glance

R&D Tax Credits were first introduced in the new millennium to incentivise businesses to invest in innovative practices. They were originally intended exclusively for SMEs but were rolled out for larger corporations in the years since, with a special scheme for vaccine development.

The Tax Credits offer either relief from Corporation Tax liability or a cash payment where this is not applicable. Businesses can claim for their own R&D as well as R&D carried out for a client.

How much can businesses claim?

As of April 2015, SMEs can claim for tax relief on up to 230% of qualifying R&D spend.

It’s worth noting that your business does not necessarily have to have turned a profit or paid corporation tax to apply for R&D Tax Credits. In some circumstances, loss making companies can surrender their losses in return for a payable Tax Credit.

The amount that a loss-making company can receive in R&D Tax Credits is capped at three times its total PAYE and National Insurance liability. This is a measure put in place to prevent unscrupulous businesses from abusing R&D Tax Credits Relief by employing artificial corporate structures.

Does my business qualify?

Because innovation can occur in any department of any business in any industry in any sector, virtually any business can apply for R&D Tax Credits. All you need to do to apply under the SME scheme is fulfil HMRC’s definition of an Small to Medium sized Enterprise. That is to say that you employ 500 people or fewer and that your annual turnover (not profit) does not exceed £100 million.

  • Profit making SMEs can claim back 25p for every £1 spent on qualifying R&D activities
  • This increases to 33p for every £1 for loss making SME R&D
  • A large company may claim 10% of R&D costs under the Research and Development Expenditure Credit (RDEC)

What counts as qualifying expenditure?

HMRC has clear guidelines on what does and does not qualify as R&D expenditure. Capital expenditure such as manufacturing plant does not qualify (although a separate Research and Development Allowance may apply). Land cannot be claimed for nor can the production and distribution of goods and services. You can, however, claim for;

  • Staffing costs (not including support staff)
  • Up to 65% of subcontracted R&D costs
  • Software used directly for R&D
  • Consumable items
  • Cost of developing / manufacturing prototypes

Can I only claim for the current financial year?

Some SMEs may not be aware that they can claim retroactively for up to 2 years before the current financial period. So, when claiming for the 2020-2021 tax year you will be able to claim for all research and development expenditure within the tax period beginning on 1st April 2018 and ending on 31st March 2019.  If you wan to know more about claiming for R&D tax credits in previous years, our blog HERE covers this.

Can I claim if I’ve already claimed for a grant?

Yes, absolutely. Although the status of your grant entitlement will affect how much you can claim in R&D Tax Credits.

How we can help

The process of making a claim for R&D Tax Credits for a limited company can be extremely complicated and time-consuming. That’s where we come in. We take the burden of making a claim off your shoulders. We know the ins and outs of the applications process, and can increase your chances of making a timely and successful claim. We understand the sticking points which can lead to a claim being lost or denied, and we work hard to ensure that our clients avoid these potentially damaging outcomes in their applications.

In fact, we’re so confident that we can deliver a timely and successful claim, we operate on a no win-no fee basis. So you have nothing to lose by letting us assist you in making your claim.

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