What is R&D tax relief?

Did you know that companies are claiming up to 33% of their research and development expenditure back as a tax credit?

Research and Development (R&D) tax relief is a valuable way that the UK Government aims to encourage growth and reward companies investing in innovation. The money claimed back can be used to financially support your business and help it grow.

Get in touch

The key is uncertainty and advancement

The UK Government’s Research and Development Tax Relief scheme is remarkably inclusive and companies in any sector can be eligible. Both profitable and loss making companies can benefit from an R&D tax relief claim. A loss-making company can surrender the losses incurred in carrying out R&D for a repayable cash credit, while a profit-making company can get a deduction in their tax liability. You can claim R&D tax credits retrospectively for up to two years after the accounting year-end date. To learn more about how the accounting periods impact your claim, click here.

What qualifies as innovation in the eyes of HMRC?

For tax purposes, R&D takes place when you are creating something that will advance the overall knowledge or capability in a field of science and technology. In simple terms, if you are solving industry, problems creating new software, materials or aiming for a particular outcome but are unsure you have all the answers to get there because its unique and goes beyond established methodologies, you have a potential claim.

A word of caution. When businesses try to understand whether their work qualifies, a common mistake is that they consider it from a commercial perspective rather than from an innovative one. While something can be commercially innovative, it may not be innovative from the perspective of R&D tax relief because it doesn’t aim to solve a technological or scientific uncertainty. Click here to learn more about how to distinguish a qualifying R&D project from a project that is commercially innovative.

How does a business claim R&D tax relief?

R&D tax reliefs are administered by HMRC and the claims are filed via the company’s CT600 corporation tax return. The benefit comes in the form of a corporation tax (CT) liability reduction or cash credit from HMRC. A profitable company can reduce its CT payable or claim a refund on CT already paid. Taxpaying companies can claim up to £26 back for every £100 spent on R&D, while loss-making companies can claim up to £33. Claims can be made within two years of the end of their related accounting periods and the benefit which can be expected will range between 19% and 33% of the R&D expenditure.

Can your claim be submitted after the original or first CT600 has been filed?The short answer is yes. It is possible to submit an R&D claim as an amendment to the CT600. For more steps on how to do this, you can sign up to Novel, and find the submission instructions in the Claims section or reach out to us for help.

If you are using Novel to prepare your R&D tax relief claim, you will be able to export the report with the correct expenditure figures. All that is left to do is to record the relevant R&D expenditure in the CT600 and attach the report produced in Novel to the form.

What costs qualify?

To successfully claim R&D tax relief, a business needs to understand the concept of qualifying costs. Depending on whether a company is loss-making or profitable, a start-up can receive between 18.9% and 33.4% of its R&D costs back. However, certain cost categories have restrictions on the total amount that can be claimed back.

For example, you can claim up to 100% of eligible staff costs but only up to 65% of eligible subcontractor costs. Further apportionments may be required if not all the work undertaken by the staff member was spent on the innovative R&D project. You can learn more about this topic by clicking this blog post or our R&D tax relief software Novel has further guidance within the system.

Different R&D tax relief schemes and their rates

The rate of relief that companies can claim depends on the size of the company, and whether the company has received a grant or is a subcontractor. On average, SMEs are able to claim up to £33 for every £100 spent on qualifying R&D activities. Large companies are able to claim up to £10 for every £100 spent on qualifying R&D activities.

This is because there are two types of tax credit schemes that a company can claim, known as SME R&D tax relief and Research and Development expenditure credit (RDEC). For a more in-depth guide about the different schemes, check out the following blog. Please keep in mind that at the moment, Novel can only handle SME R&D tax relief schemes but stay tuned for when we roll out our RDEC feature!

Are you using Novel for your R&D tax relief claim?

Want to find out more about R&D tax reliefs or how Novel can help you produce your next claim? Get in touch below.

Get in touch