Small or medium-sized enterprise (SME) Research & Development Tax Credits are a valuable tax relief that allows qualifying companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the usual 100% deduction, to make a total 230% deduction.
- Claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss.
For accounting periods beginning on or after 1 April 2021, a cap applies to the amount an SME can claim as an R&D tax credit, calculated at £20,000 plus 300% of its total liability for PAYE and NICs for the period.
To claim the relief, you need to be an SME (see below) and show how your project meets HMRC’s definition of R&D.
Companies that are making their first R&D claim can qualify for Advance Assurance. If HMRC grants Advance Assurance, any R&D claims in the first three accounting periods will be accepted if they align with what was discussed and agreed.
Who can claim relief?
To claim R&D tax relief, you need to be an SME, defined as having:
- Less than 500 staff
- A turnover of under €100m or a balance sheet total under €86m
If your company has external investors, this may affect your SME status. You need to include the figures of connected and partner companies when you work out if you’re an SME.
You cannot claim SME R&D relief if the project is already getting notifiable state aid or another company has subcontracted you. However, you may be able to claim the R&D Expenditure Credit (RDEC).
Your company is connected to another one if:
- It holds over 50% of the voting rights in another company; or
- Another company holds over 50% of the voting rights in your company.
The staff, turnover and balance sheet of any connected companies should be included in your total when you work out if you’re an SME.
You have a partner company if:
- Another company holds over 25% of your voting rights or capital; or
- You hold over 25% of another company’s voting rights or capital
You need to include a proportion of the staff, turnover and balance sheets of partner companies when you work out if you’re an SME; this should be based on the percentage of voting rights and capital that connects the two companies. For instance, if you own 30% of another company, you should include 30% of its staff, turnover and balance sheet.
What Costs Can You Claim?
You can claim for several project cost categories starting from the date you start working on the project until you develop or discover the advance or the project stops.
For staff working directly on the R&D project, you can claim a proportion of their:
- Class 1 National Insurance contributions
- Pension fund contributions
You can also claim for administrative or support staff who work to support a project directly. For example, human resources staff used to recruit a specific person to work on the project.
You cannot claim for clerical or maintenance work that would have been done anyway, like managing payroll.
But you can claim 65% of the relevant payments made to an external agency if they provide staff for the project.
You can claim 65% of the relevant costs of using a subcontractor for your R&D activities.
You can claim software licence fees bought for R&D and a reasonable share of the costs for software partly used in your R&D activities.
You can claim for the relevant proportion of consumable items used up in the R&D. This includes:
Clinical trials volunteers
For R&D projects in the pharmaceutical industry, you can claim payments made to volunteers involved in clinical tests.
Costs That Cannot Be Claimed
You cannot claim for:
- The production and distribution of goods and services
- Capital expenditure
- The cost of land
- The cost of patents and trademarks
- Rent or rates
When The R&D Activity Starts and Ends
A challenge that arises in many claims for R&D tax relief is “when does the qualifying R&D activity start and finish?”.
Qualifying R&D activity must be part of a specific project to make an advance in science or technology.
The project must relate to your company’s trade – either an existing one or one that you intend to startup based on the results of the R&D.
To get R&D relief, you need to explain how a project:
- Looked for an advance in science and technology
- Had to overcome uncertainty
- Tried to overcome this uncertainty
- Could not be easily worked out by a professional in the field
Your project may research or develop a new process, product or service or improve an existing one.
The R&D activity starts when you begin working to resolve the uncertainty. You need to identify the technical issues that need to be fixed and ensure there isn’t an existing solution already worked out.
The R&D activity ends when you solve the uncertainty or stop working on it. The activity you claim R&D relief for should end once you have a working prototype that solves the problem and before you go into production.
Your R&D may restart if you find another scientific or technological uncertainty after you’ve started producing the product. If this happens, you can claim for further R&D while you try to resolve it.
How To Claim R&D Relief
You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.
You claim the relief by entering your enhanced expenditure into the full Company Tax Return form (CT600).
You can then use HMRC’s online service to support your claim.
When you submit your evidence to support your claim, you will need to explain how your project has addressed the issues mentioned above:
How Your Project Looked For An advance in Science or Technology
Your project must aim to create an advance in the overall field, not just for your business; this means an advance cannot just be an existing technology used for the first time in your sector.
The process, product or service can still be an advance if another company develops it but is not publicly known or available.
How Your Project Had to Overcome Scientific or Technological Uncertainty
A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done – even after referring to all available evidence; this means that your company or experts in the field cannot already know about the advance or how you achieved it.
How Your Project Tried to Overcome This Uncertainty
You should show that the R&D needed research, testing and analysis to develop it.
You need to explain the work you did to overcome the uncertainty; this can be a simple description of the successes and failures you had during the project.
How This Uncertainty Could Not Easily Be Worked Out By A Professional In The Field
You should explain why a professional could not easily work out your advance.
You can do this by showing that other attempts to find a solution have failed.
You can also show that the people working on your project are professionals in that field and get them to explain the uncertainties involved.
Let me know in the comments if you have any questions. Always happy to chat and to help if I can.