Research and development
What Are Research & Development (R&D) Tax Credits?
What Do You Need To Be Doing?
The two key criteria in determining who is eligible for R&D tax credits are ‘innovation’ and ‘uncertainty’.
A basic definition of R&D is to “work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology”. This can include new or developed products, services or processes.
What Could You Expect?
The tax relief on allowable R&D costs incurred on or after 1 April 2015 is 230% therefore, for each £100 of qualifying costs, your company could have its Corporation Tax profits reduced by an additional £130 on top of the £100 spent.
If instead there’s an allowable trading loss for the period, this can be boosted by 130% of the qualifying R&D expenses. This loss can be utilised in the normal way or ‘sold’ to HMRC for a cash sum.
How Much Could You Claim?
R&D credits may be claimed in respect of any sum. The previous minimum limit of £10,000 has been removed. The maximum that may be claimed is €7.5m for any one project. However, the claim must be made within two years of the end of the accounting period in which the R&D expenditure was incurred.
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R&D Revenue Expenditure Includes:
Staffing costs – for SMEs and large companies this category can include gross salaries, NI contributions, employer pension contributions and certain reimbursed business expenses.
Externally provided workers (EPWs) – EPWs are individuals provided to your company through a staff provider. They must operate through this staff provider instead of contracting directly with your company as individuals. Common examples include agency staff, contractors, and freelancers.
Subcontracted R&D – costs you can include for subcontractors differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you are making an RDEC claim, money spent on subcontractors does not normally qualify for tax relief – but there are exceptions. If you are making an SME claim, you can include 65% of payments made to unconnected parties.
Software – Your expenditure on computer software involved in R&D activities may be included. As for other categories, software partly used for R&D can be included at a reasonable apportionment.
Consumables – Materials consumed or transformed in your R&D process are defined as consumables, this includes water, fuel, and power. Your expenditure on the materials consumed or transformed in the R&D process may be included in your claim. Common examples include materials for the construction of prototypes or for use in trials.
Payments to the subjects of clinical trials – This cost typically only features in the pharmaceutical industry. Where companies pay people who are involved in clinical trials to test the efficiency of drugs as part of an R&D project.