Research and development tax relief
You will learn
- What research and development tax relief is
- How to claim for research and development tax relief
- How advance assurance can help you get your tax relief
If you are working on a project that is going to advance knowledge or capacity in your industry, then you might qualify to claim for research and development tax relief. There are likely to be things in your business that you can do more efficiently – turning your waste products into something useful, for example – so why not invest in the research to make that happen? It might cost you in the short term, but can end up saving you lots in the long term and with research and development tax relief and innovation grants, it might not cost you as much as you might think.
You might be hesitant to apply because you don’t want to take time away from running your business to fill out the paper work. To speed the process along, you can apply for advance assurance which allows your business up to three years of automatic research and development tax relief.
Defining a research and development project
Defining a research and development project might be easier than you think. Are you looking into a way of turning the waste materials from your production into something useful? Or maybe you’re finding a way to make one of your machines work more efficiently? You could have an innovative solution to share with your sector and may qualify for research and development tax relief.
These are the guidelines that the government use to see if a business qualifies for a research and development tax relief:
- Advancement in science or technology
- Directly contribute
- Scientific or technological uncertainty
Not particularly helpful, right? Essentially, what the government are looking for are businesses that are actively conducting research projects that will further knowledge in a field. The "scientific or technological uncertainty" part of that list just means that there is an idea that is possible in theory, but has yet to be developed in reality, which is where you can come in with your innovative design. You will "directly contribute" to your industry with the product that is created as a result of your research.
The two types of research and development tax relief
When applying for research and development tax relief, you’ll have to decide whether you want to apply for the SME scheme or research and development expenditure credit scheme. There is a significant difference in the amount of relief you can claim between the two schemes, and which you can apply for will depend on the type of business you run.
You can apply for the SME scheme if you have less than 500 employees, an annual turnover of less than €100 million, and a balance sheet under €86 million.
The SME tax relief on research and development costs is 230%. What that means, is for every £100 you spend directly on your research, your company tax could be reduced by £230.
If you’re a subcontractor doing work on behalf of another business you won’t be able to claim under the SME relief, but you can apply for the research and development expenditure credit scheme.
The research and development expenditure credit scheme allows you to claim tax relief if you spend at least £10,000 on qualifying costs. The tax relief for these businesses is 130%, so for every £100 spent, the company tax could be reduced by £130. If you don’t qualify for the SME scheme, you can apply for this research and development tax relief instead.
Costs that qualify for tax relief
There are lots of different costs that you can research and development tax relief for, though not all may apply to your business.
You can claim tax relief on any staff who are directly employed by you to carry out the research. If they are consultants or agency workers, then you won’t be able to quality.
You might be able to claim for your consultants and agency workers under the staff providers’ relief, however. The agency that provides the staff must have a contract directly with the individual you are employing for the research, however, and not one through another person.
Materials and utilities
You can claim for the physical materials you are using to conduct your research, but not for data costs or telecommunication. The tax relief includes for the power, water, and fuel used for your research.
Payment to clinical trials volunteers
Payment to participants for a clinical trial also come under qualifying costs for a research and development tax relief. This will be particularly applicable to businesses who are developing a new medical treatment and need to test the effects on both healthy patients, and those who have the disease or condition the treatment has been created for.
Computer software is likely to play an important part in your research, so it’s good news that you can claim the tax relief for it. It cannot be used for software to train your staff however, it has to be specifically related to your research.
If you are claiming tax relief under the SME Scheme, rather than the large company scheme, you can claim for up to 65% of the money you spend on hiring someone to conduct your research for you.
How to claim for research and development tax relief
You can claim research and development tax relief for up to two years after you have finished your research. So, if you have innovated in the past two years and created a solution to a business problem you can claim and get back some of your expenses during that time.
There is space on your Company Tax form for applying for your research and development tax relief. Specify which relief you want to qualify for, either the SME (box 99 on the form) or the research and development expenditure credit scheme (box 100) relief. You then have to figure out what your extra expenditure was over that period and multiply the amount by 230% if you qualify for SME tax relief, or 130% for the research and development expenditure credit scheme, and write that into box 101.
Though it isn’t a legal requirement, it’s also useful to HRMC if you include some information as to why you consider your project qualifies for the tax relief, as well as a summary of the payments you made over the course of the research.
Your claim can then be sent off for approval. When accepted, if you just wanted a straight forward relief, the amount you will be charged in tax will be lessened. If you wanted to claim it back in tax credits the process will take a little longer, as HMRC will only make the payment after they receive your return.
Advantages of advance assurance
You might be hesitant about applying for research and development tax relief because you don’t want to be turned down and have wasted your time. This is where advance assurance can help. It’s a pre-claim application that can support your application for research and development tax relief.
When applying for advance assurance of your research and development tax relief, you’ll have an HMRC specialist on hand to help you understand and comply with the R&D tax relief conditions. This can speed up the process and make sure that you’re ticking all the right boxes.
If you are given advance assurance it means that you will be given R&D tax relief for up to three years without question. This will let you focus more on your business and stop you having to worry about getting the forms right each year.
In some cases, having advance assurance can also help you to get funding. It shows potential investors that you are creditable in your research and can encourage them to work with your business.
Who can apply for advance assurance?
You can apply for advance assurance if you are planning to carry out, or have previously undertaken, research and development in your sector.
To qualify, your business must:
- Have fewer than 50 employees
- Have an annual turnover under £2 million
- Not have claimed R&D tax relief before
- If your business is part of a bigger business group, you may still be able to claim the relief if you meet the criteria. However, if another business within your group has made a claim for research and development tax relief yours won’t be able to qualify.
You won’t be granted advance assurance for research and development tax relief if your business is part of the Disclosable Tax Avoidance Scheme (DOTAS) or if it is a "serious defaulter" (businesses who have purposely avoided tax payments or caused serious problems for HMRC).
What information do you need to apply?
To apply for advance assurance, you’ll need to give some basic information about your business and the research and development activities you’re undertaking.
You’ll also need:
- Your business accounts
- Your business registration documents (from Companies House)
- HMRC correspondence
- Old tax returns (unless you’re a start-up)
- Details for your main contact that HMRC can talk with about your application
What happens after you’ve applied for advance assurance?
After you have applied for your advance assurance, HMRC will assess your application. They’ll get in touch with you, usually through a phone call to their main contact in your business. If the case for your business is more complex, they might come and visit you personally.
It takes approximately three months for successful applications to be agreed upon and for your agreement letter to arrive. You can use this letter as the proof potential investors might want to see before agreeing to work with your business.
If your application hasn’t been successful you’ll receive a letter which will explain why you haven’t qualified for the relief.
Head over to our funding page to see what grants and loans your business could be eligible to support your business growth.