Do you know you can apply for R&D Tax relief if you are innovating in science, technology and digital?

The government introduced a scheme (SME scheme) to incentivise scientific and technological innovation. If your company conducts R&D activities and your company is subject to Corporation Tax, the R&D tax relief can either reduce your tax bill or give you tax credit in cash, depending on how you choose, both will give your business a much needed boost.

This article provides an overview of R&D Tax relief.

What projects/activities qualify?

To qualify, you must be conducting Research and Development projects that seek advance in field of science and technology. This can include software development, engineering design, and bio-energy sciences.

What costs qualify?

The qualifying costs are:

Direct R&D staff costs, including salary, NI and pension. The founding director will normally have a percentage of time dedicated to R&D activities, and can be claimed. Office administrative staff’s costs are not qualified.

Externally provided R&D staff – 65% of the payment to the unconnected provider can be claimed for relief.

Consumables – 100% claimable.

Prototypes – 100% claimable.

Costs relating to patent application, capital expenditure on lands, plant, machinery and buildings are NOT qualifying costs.

Subcontracted R&D:

  • If your company is a contractor – 65% claimable
  • If your company is a subcontractor – 11% claimable

How to make the claim?

You can make the claim on your normal Corporation Tax return (CT600). There are two types of benefit to choose from:

  1. To claim payable tax credit, at 14.5% – preferred option by companies with little revenue (hence little profit). It is a boost to the company’s cash.
  2. To claim deduction to corporation tax, at 20% – preferred option by companies with corporation tax liabilities. 20% is greater than 14.5%!

You will have to work out an allowable expenditure figure, time that by 130% to get to the enhanced R&D expenditure, considering the corporation tax position, you will get either:

  1. Cash repayment from HMRC to your company – for option 1
  2. Reduced corporation tax bill – for option 2

Other things to consider

The SME scheme is a notifiable State Aid, if you have received grant or funding classified as State Aid, you can not claim tax relief under any of the above options. However, you can still claim 11% tax relief on eligible expenditure under the RDEC (R&D Expenditure Credit) scheme.