Cash flow is arguably one of the most important parts of managing your small business. So any tax incentives, or potential tax relief opportunities which are available should always be grabbed with both hands.
But then, you often hear stories about how great these incentives and reliefs are, only to find that there are lots of conditions and qualifying factors, which mean you can’t actually benefit from them.
Thankfully, Research and Development tax relief isn’t like that. As long as you are genuinely investing in R&D projects, there’s a great opportunity to cut your corporation tax bill, or even get tax credits from HMRC in the form of an actual cheque!
So, what do you need to know about Research & Development Tax Relief Incentives?
What are R&D Tax Relief incentives?
Research & Development Tax Relief is an HMRC incentive on corporation tax, aimed at stimulating innovation and development in UK industries.
The Government wants to encourage businesses to invest in new technologies and scientific development, and so they offer generous reliefs and credits for companies that participate in some form of R&D.
With these reliefs, businesses can substantially reduce their corporation tax liability, eliminate it all together, or even receive a cash lump sum back from HMRC.
Claiming this tax refund can therefore give your business a really welcome cash injection.
The R&D Tax Relief Scheme has an extremely large scope, and yet many business owners and SMEs are simply not aware of the potential for saving.
It’s not a new scheme either, and has in fact been around for over 10 years. If your accountant hasn’t mentioned it to you previously, you might want to get in touch with them and find out why.
Can any business claim R&D Tax Relief?
There are some limitations on which businesses can claim R&D Tax Relief.
The main criteria you need to know about is that to be eligible your business must be liable for corporation tax.
Businesses that are run as sole traders, LLPs or partnerships are therefore not eligible for the scheme. If your business is run as one of these structures, and you think you might be able to save some money through the scheme, you might want to consider becoming a limited company.
Before incorporating a limited company, we suggest you speak to an accountant to decide if this is the best course of action for your company.
As well as being liable for corporation tax, in order to claim R&D tax relief, companies must also meet these requirements:
- Be a small or medium sized business for the SME scheme, with less than 500 employees and a turnover less than €100 million, or a balance sheet not exceeding €86 million. If the company is part of a larger group, there are complex rules which need to be factored into the SME threshold test. There is a separate scheme for large companies.
- Have actually spent the money already on research projects – you can’t claim proactively.
- Have undertaken work which, according to HMRC, ‘achieves an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.’
It doesn’t have to be rocket science
This can sound more complicated than it actually is. You don’t necessarily need to be in a high tech industry or have innovative boffins and rocket scientists working in your company. You can claim for R&D tax relief without the need for test tubes, lab coats and fancy scientific equipment.
Whilst your research should be advancing some kind of development in your field and not be easily deducible by others in your industry, as long are you’re making something bigger, better, faster, cheaper or more efficient, then your project would likely qualify.
It doesn’t have to be ground breaking! If you’re making a beneficial change to a product or process as a result of your R&D, then a good accountant should be able to help you make a successful claim.
Misconceptions about R&D Tax Relief
Many companies mistakenly believe you have to be working in a high tech, scientific or medical industries to claim for R&D tax relief, but as we’ve just outlined, this simply isn’t the case.
There are a few other common misconceptions around R&D tax relief too, which many businesses think will prevent them from claiming, such as:
- The company already receives a grant
- They are making taxable losses
- The project is unsuccessful
- They need to own a patent or formal intellectual property
But again these aren’t true!
Even if your business is receiving other grants, or invests in an R&D project which is unsuccessful, you can still claim R&D relief under the scheme in most cases.
Again, for the best advice on whether your company can apply for tax relief or credit, you should speak to your accountant.
How much could my business save?
The amount you can claim varies depending on the size of your business, and the rates of relief can sometimes differ each financial year.
Currently, for every £1 your company spends on research and development projects, you can claim tax relief back on £2.30, under the SME scheme. For a small business, this essentially means your costs are enhanced by 130%!
To illustrate, how R&D tax relief works in practice, let’s say you are running a business that has a taxable profit of £50,000, and you have spent £25,000 on R&D.
To calculate the R&D relief you’d be entitled to, you multiply your R&D spend by 130%. So, in this example, the amount of R&D tax relief is; £25,000 x 130% = £32,500.
You would therefore have, £32,500 of tax relief which can be subtracted from your taxable profit figure for the year, to reduce the amount of corporation tax you need to pay.
With the R&D relief, the amount of taxable profit that corporation tax is due on is calculated as follows;
£50,000 – £32,500 = £17,500.
With corporation tax at 19%, you would need to pay tax of £3,325 (£17,500 x 19% = £3,325).
Without the R&D relief, you would have to pay £9,500, of corporation tax (£50,000 x 19% = £9,500).
So in this example, the R&D tax relief scheme would make an actual saving of £6,175 in corporation tax.
Is it possible to get a cash refund through the scheme?
If your company is making taxable losses then instead of relief, you are able to claim R&D tax credits, paid in the form of cash.
Such a cash injection can be extremely welcome for many businesses, especially if they’ve spent a large amount on R&D and need money back in the accounts for cash flow purposes.
However, whilst a cash injection may be more beneficial, as you can currently claim 14.5% of your taxable loss in R&D tax credits, the actual tax saving you make is lower if you opt for a tax credit instead of claiming tax relief.
For example, if your business had a taxable loss of £10,000, but with the spending on R&D added this made a total taxable loss of of £40,000, you could be entitled to a tax credit, in the form of cash from HMRC of £5,800 (£40,000 x 14.5%).
Real life examples of businesses taking advantage of R&D tax reliefs
To illustrate how real businesses can save money with tax relief, or get a cash injection, here are some examples of clients we have at Mitten Clarke Chartered Accountants that have taken advantage of the scheme;
- A company specialising in applying road markings developed a new technique to use these types of applications for advertising on car parks. In the last three years, they saved £523,423 in corporation tax.
- Researching and developing software solutions to help improve fleet tracking and driver response times, this small business had been conducting R&D for a number of years but never claimed. With the right help and advice, they received a tax refund of over £60,000.
- Another company which designs and manufactures a range of electrical insulators developed some bespoke insulation for one of their clients, and successfully saved £46,104 in corporation tax.
- A company which specialises in the manufacture of components, were aware of R&D tax credits but had been previously told they weren’t eligible. They have now saved £50,467 in corporation tax.
- A landscaping company has saved over £268,836 over the last 5 years by developing an artificial nesting structure for a specific bird species to offset the loss of habitat next to a business park.
You’ll find countless more examples of how businesses just like yours have claimed tax relief and credit for research and development, so make sure you speak to your accountant to see how you can save too.
Flow chart outlining who can claim R&D Tax Credits and Relief
This flow chart will help you to quickly work out whether you are likely to be eligible to claim R&D Tax relief or credits.
What should go in to a claim?
With regards to what types of expenditure you can claim for under the R&D Scheme, again, it’s best to speak to your accountant. However, as long as the following overheads are directly related to the project, then you’ll qualify for relief on:
- Employment and subcontractor costs
- Testing and trialling costs
- Energy and utility bills
- Software and licences
How does a business claim R&D tax relief?
In order to make a claim, you need to perform a detailed review of all your activities, to work out all of the expenditure which falls under any R&D projects. You’ll then need to apply to HMRC and fill in the appropriate forms.
This involves providing a technical narrative as to why your R&D project should qualify, along with a detailed breakdown of any costs you are looking to claim for. You’ll then need to amend the CT600 form for your company, which states your corporation tax liability.
Of course, you can do all of this yourself, but as with most tax filing procedures, there are lots of little bits which might catch you out, so you do need to take care. We’d recommend speaking to your accountant about the R&D Tax Relief Scheme, as they should know exactly what they’re doing, and can apply on your behalf.
If nothing else, just enquire with your accountant simply because they should be able to save you time, maximise your claims and get you the highest amount of relief possible!
About the author
This guide has been written for ByteStart by Mandy Mitten, Director of Mitten Clarke, the award-winning, leading Chartered Accountancy firm in Stoke-on-Trent, Staffordshire.
More from ByteStart
ByteStart is packed with lots of help and great advice on all aspects of running your own business. Try some of our most popular guides and articles for starters;
- Sole trader tax – a guide for start-ups and the newly self employed
- 10 ways small business owners can pay less tax
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
- How to choose the best online accounting software for your business
- A Guide to book-keeping for small business owners
- 15 Questions to ask an accountant before you hire them
- Book-keeping basics every new business owner must know