Research and Development Tax Relief and Credits – proceed with caution!
Research and Development Tax relief – what exactly is it?
Research and development tax incentives effectively reward innovative firms, and encourage investment and diversification, and support such firms in creating new products, processes and services.
There is a further benefit to the wider economy from increased spending on R&D, as according to Croner, up to £2.35 additional spending in research and development is stimulated for every £1 given out in R&D tax relief.
Here’s a very (very) short video if you would just like a snapshot, or read on below for more detail:
How is research and development tax relief calculated?
If you’re running a profitable SME (small to medium sized enterprise), then the average benefit received is 25% of the project spend.
In reality, the rate for many businesses is less, as the full relief can only be claimed if the company remains profitable after deducting the enhanced expenditure.
If your business is loss-making, then no relief can be claimed, but you can instead apply for a research and development tax credit of up to 33% based on the surrender credit amounting to 14.5% of Enhanced R&D costs
How can you calculate the research and development tax relief as 230%?
SME R&D relief allows companies to:
deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
Which sectors can apply for research and development tax relief?
The criteria to qualify for R&D tax relief has always been purposefully broad, in order that any company, regardless of sector, which is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ may make a claim.
Costs associated with the qualifying projects which can be claimed include:
staff costs (including expenses, pensions and NICs)
Subcontractor or freelancer costs
Materials and consumables used or transformed by the process
Certain types of software
Payments relating to clinical trials
How easy is it to make a claim?
It’s really very simple – you enter the total qualifying expenditure in the correct place on your full Company Tax Return form.
And you can even backdate a claim as much as two years after the end of the accounting period.
However, HMRC has currently halted the payment of research and development (R&D) tax credits while it investigates irregularities in claims.
Due no doubt in part to the ease of making a claim, and the limited checking of such claims, it would appear that a large number of rogue ‘R&D consultants’ have been targeting small businesses and making inappropriate or false claims, specifically by loss making firms:
A HMRC spokesperson said: ‘We have paused some research & development tax credit (RDTC) payments while we investigate some irregular claims.
‘The majority of R&D relief claims are unaffected but there will be some delays to our usual processing times. This is to ensure we prevent abuse of the relief.’
HMRC sent a letter to all firms saying that there may be delays to processing times for R&D tax credit claim and that they are taking care to ‘ensure they prevent abuse of the relief’.
They added that most claims are genuine, but that firms should submit ‘additional information to support any claim, such as an R&D report, to help HMRC to process claims quicker’, and that if a claim that is incorrect, inflated, or fraudulent is submitted then a penalty could be issued.
We expect more information on the outcomes of this investigation next week, and in the meantime, buyer beware – if it seems too good to be true, then it probably is!!
If you would like to discuss this, or any other accountancy requirements for your limited company, then please contact us and we will be happy to help
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