R&D Tax Credit relief was established in 2000 to reward small businesses for innovation, improvement and investment. The scheme applies to all SMEs undertaking R&D (research and development) within the government’s definition.
The SME R&D tax credit scheme reduces corporation tax liability by 130%, in addition to the usual 100% reduction on taxable expenses. It is non-taxable income, so appears below-the-line on a company’s profit-and-loss account, as either a tax reduction or credit.
Approved Accounting help many small businesses to identify R&D activities, account for them correctly and submit a successful R&D tax credit claim. As such, the focus of this article is on the SME R&D tax credit scheme, rather than the RDEC scheme for larger businesses.
What are R&D tax credits?
The government’s SME Research & Development scheme (R&D) exists to reward innovation that contributes to economic growth. It allows companies undertaking R&D to claim an extra 130% of their expenditure, either as a deduction to taxable income or a repayable credit.
That is on top of the usual 100% reduction on eligible expenses, so a massive 230% in total.
A credit of that size is obviously very valuable to small businesses, many of which are already taking advantage of the scheme to fuel their business growth. At Approved Accounting, we can guide you through the sometimes complex process and help you claim rewards for your hard work.
Can I claim R&D tax credits?
If you are an SME undertaking research and development, then you may well be eligible to claim an R&D tax credit or deduction.
Larger businesses (typically those with more than 500 staff) can seek tax relief through a different scheme, known as R&D expenditure credit (RDEC).
Approved Accounting work with SMEs in many sectors to successfully claim R&D tax credits. We find that quite often, companies can be put off by the lengthy guidelines and complex definitions set out by HMRC for R&D Tax Credit relief, or are simply not aware that their efforts qualify.
The good news is that in order to be eligible for the R&D tax credit scheme, you don’t have to be making advances in medicine or space tourism…
As long as you are a Limited Company making a valuable contribution to advance your field (as opposed to just your own business), then you could qualify for a considerable reduction to your Corporation Tax.
What qualifies as R&D?
As with all tax credit claims, the government set out strict guidelines on what qualifies as R&D.
In short your project must:
- look for an advance in science and technology
- identify a technical uncertainty
- attempt to overcome this uncertainty
- ensure that the solution doesn’t already exist or be easily worked out by other professionals in the field
For SMEs in a variety of sectors, this could include finding solutions to industrial, scientific or technological uncertainties or developing new products, manufacturing processes and software.
Even if you are unsuccessful in finding a solution during your project, you can still make a claim on eligible expenditure, such as staffing, subcontracting, consumables and software. Expenditure on fixed assets, such as buildings and land, does not qualify.
How do you claim R&D tax credits?
R&D tax relief can be claimed as part of your company’s annual tax return and is awarded as a deduction on your Corporation Tax bill, or as a refundable credit.
You must complete the necessary paperwork, including the total qualifying expenditure, supported by relevant documents. For small companies, this can be very time consuming. Approved Accounting can take the pressure off by identifying eligible expenditure and completing the claim on your behalf.
What is the accounting treatment for R&D tax credits?
The main point to remember here is that R&D tax credits are non-taxable income, meaning that they are shown simply as a reduction on Corporation Tax, or as a refundable credit. When it comes to the accounting treatment, there are different ways of recording the claim, depending on how soon you know the value of your R&D claim.
How do I record my R&D tax credit claim?
Accounting for your R&D tax credit is all a matter of timing. For a Limited Company, the deadline for submitting annual (statutory) accounts is usually before the cut-off date for the Corporation Tax Return. So how you show your tax credit/reduction on your profit and loss sheet (also known as an income statement) depends on how early your R&D expenditure is calculated.
If you know your R&D claim calculation early, i.e. before finalising your accounts, it is simply shown on the tax line of your income statement as a Corporation Tax credit/reduction. It can be shown as an estimate if need be.
If you do not know the value of your R&D expenditure at the point of submitting your accounts to Companies House, then it can be added as a prior year adjustment.
For larger companies using the RDEC scheme, the process is different, as the benefit is shown as an above the line credit.
Contact Approved Accounting for advice on R&D tax credit
We can help you navigate the sometimes thorny R&D process, to make it as pain-free as possible. Our team will help you determine which activities qualify as R&D, identify the qualifying expenditure, submit your claim and help you account for it accurately.
Contact us today and allow us to help you reduce your Corporation Tax liability and invest in the future of your business.