R&D Tax Credits for SMEs
Approved Accounting - R&D TaX Credit Experts for SMEs
At Approved Accounting, we find that there is a lot of misunderstanding as to who qualifies for the R&D tax relief scheme. HMRC rightly rewards any company, including SMEs, for their research and development efforts, and we’re dedicated to helping them get the tax credits they deserve.
SMEs that undertake any kind of R&D project are eligible to make a claim for R&D tax relief. It can be awarded as a payable tax credit of up to 14.5% of the claim, or as a tax relief. The project, however, must meet strict criteria set by HMRC.
For ambitious SMEs, R&D tax relief can provide a valuable addition to their bottom line, year after year. If you’re not sure where to start when it comes to claiming R&D tax credits, then contact Approved Accounting today. We can help you navigate the sometimes complicated scheme and ensure you maximise your claim.
Who qualifies for R&D Tax Credits?
R&D tax relief is comprised of two schemes, one aimed at SMEs (Small to Medium-Sized Enterprises) and one aimed at larger companies. Here at Approved Accounting, we specialise in R&D claims for SMEs, although we are well-versed in both schemes.
To qualify, your SME must:
- have fewer than 500 staff
- have a turnover of under £86m
- should not be receiving state aid towards the project for which you are claiming
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What projects qualify as R&D?
As to what qualifies as an R&D project, it’s often underestimated or misunderstood. It’s not just big project launches or breakthrough projects that are rewarded. Many of our clients are pleasantly surprised to learn that most of their research and development efforts are eligible, even those they consider ‘everyday’.
As with all tax reliefs, there are a lot of terms and conditions to wade through, but at Approved Accounting we know the legislation inside out.
As a brief introduction, here is HMRC’s four-point eligibility checklist:
1. Your R&D project identified a technological advance in science or technology
- You should, of course, be 100% certain that the solution isn’t already out there.
- The advancement should be for the benefit of your sector as a whole.
- The advancement may be in relation to a new product/process/service, or an improvement to an existing product/process/service.
- The advancement must be technological or scientific in nature and not merely cosmetic.
2. Your R&D project had to overcome technological uncertainty
- In order to come up with a solution, there must have been technological uncertainty to start with. To put it another way, the technological knowledge required to fulfil your aim simply didn’t exist before. You will be required to prove that the uncertainty existed.
3. You attempted to overcome the uncertainty as part of your project
- You will be required to detail your methodology, including experimentation and testing.
- You must show that the intelligence to overcome the uncertainty could only have come from within the course of your research, and not from existing knowledge or capability.
4. The solution could not be reached by another competent expert
- You will need to prove why the solution could only be solved by your team of experts within the course of your project. If your advancement could have been easily worked out by another professional in your field, it will not qualify.
How does R&D tax relief work for SMES?
The good news is that your company needn’t be profit-making in order to make a claim. R&D tax credits can be claimed in one of two ways, depending on whether your SME is profitable.
1. Enhanced expenses relief – for profit-making companies
Under the R&D tax credit scheme, you can claim an extra 130% of eligible expenses from your yearly profit before it is taxed, at the current rate of 19%. That’s in addition to the normal 100%, making a 230% deduction in total.
2. R&D tax credit – for loss-making companies
If your company is making a loss then the allowable loss can be surrendered for a tax credit at the rate of 14.5%, or, the loss can be carried forward and offset against future profits your company may make.
It is important to note that here the tax credit might not always be the best course of action. Whilst you will benefit from a cash flow improvement, the relief offered is at a lower rate. This is why it pays to seek professional advice so you make the most profitable decision for your business.
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How do you claim for R&D tax relief?
Once you are certain that your project qualifies for an R&D tax credit, there are several stages to work through in order to make your claim
What is the qualifying period of an R&D project?
The first stage is to determine the qualifying period of the R&D project. HMRC defines the start of the project as the point you began to solve the technological uncertainty, and the end of the project as when the uncertainty was solved or abandoned. It does not include the production or distribution phase.
What costs qualify for an R&D tax credit claim?
When compiling your R&D tax credit claim, you will need to work out which costs relating to your project are eligible. Acceptable expenditure falls into the following categories:
- Employee salaries, NI and pension contributions – this includes support staff as well as technical staff, as long as the work they undertake is directly for the project.
- External agency and subcontractor costs – you can claim 65% of the cost of hiring external staff to work on your project.
- Materials – this includes physical materials, consumables, utilities and software licences, as long as the project takes up a reasonable share of its usage.
There are certain costs that are exempt, namely:
- production and distribution
- capital expenditure
- the cost of land
- the cost of patents and trademarks
- rent or rates
How do you work out an R&D tax credit claim?
Once you have worked out your eligible R&D expenditure, the figure is multiplied by the current rate of 130%. On your company tax return, this sum is added to the normal 100% of costs deducted from your annual profit.
When can I make an R&D tax credit claim?
R&D tax credits can be claimed up to 24 months following the completion of a project. To make a claim, you will need to include it in your annual company tax return.
Approved Accounting - R&D Tax Credit Experts
The team at Approved Accounting is passionate when it comes to getting our SME clients the R&D tax credits they deserve. We understand how time-consuming and confusing tax can be and that’s where we can help relieve the burden, assisting you to process your claim and achieve the maximum return.
We live and breathe R&D tax credits and can help you to boost your claim while saving you valuable time and hassle. Our team of knowledgeable tax experts is ready to answer your questions about SME R&D tax credits. Contact us at any time, we look forward to hearing from you.
R&D Tax Credits - Frequently Asked Questions
R&D stands for Research and Development, and can be defined as any work that is undertaken by a company to advance science or technology. In the UK, HMRC rewards and incentivises R&D in various sectors through the R&D tax relief scheme.
R&D tax credits are available to any company, large or small, that undertakes scientific or technological projects that advances its field as a whole. It could be in relation to a new product, service or process, or an existing product, service or process. This includes, but is not limited to, sectors such as bioscience, software development, manufacturing, food and engineering.
Absolutely. The government R&D scheme is comprised of two schemes, one for SMEs and one for larger businesses. SMEs must have fewer than 500 staff and turnover no more than £86m in order to qualify.
This is not a straightforward question! The difficulty here is not in the calculation of the credit but in identifying the allowable costs and to what extent these costs can be included. Once this figure is arrived at this is multiplied by a rate of 130% to give you the additional enhanced relief. It is here where some expert tax planning is required as the there are a couple of options available, you can either carry losses forward to offset against future profits, offset against current tax liabilities or use these losses for a payable tax credit at a rate of 14.5%.
You apply for R&D tax relief as part of your annual corporation tax return. It can be made up to two years following the completion of a qualifying project.
Qualifying R&D expenses include employee wages and NI contributions, subcontractor costs, materials, utilities (such as gas and electric), and software (providing that the R&D project claims reasonable usage). The nature of the expenditure can have an impact on the amount you can claim and in some situations the cost is restricted. You cannot claim for the expense of production, distribution, patents or trademarks.