Paying tax can be a large business expense, so why not see if you can use your position as an innovator to bring the price down a little? 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 reliefs. To speed the process along, you can apply for advance assurance which allows your business up to three years of automatic R&D tax relief. Find out more in our advance assurance article or email firstname.lastname@example.org to see what additional funding is available to you.
Defining a research and development project
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 the 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.
SME or Research and Development Expenditure Credit (RDEC) scheme?
You will need to decide whether you want to apply for the SME or research and development expenditure credit scheme.
You are an SME if you have less than 500 employees, an annual turnover of less than €100 million, and a balance sheet under €86 million.
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.
Costs that qualify for relief
There are lots of different costs that you can claim tax reliefs on, 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 and when to claim
You can claim for up to two years after you have finished your research.
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 also 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.