Let’s see if we can help shine more light on the infamous ‘research and development tax credit’.
Is your business creating a new, industry-changing product, process, or service? Or are you focusing on research to modify and improve existing products, processes, or services?
If so, your company could qualify for a research and development tax credit. This means you can make a claim to the government for some corporate tax reduction or cash payment. You can also receive both.
It’s important to understand what research and development credits entail, as well as whether you’re eligible to claim them. You should learn what activities qualify as research, what expenses qualify for credits, and what documentation is needed to make a claim, among more.
Always take full advantage of r&d tax credits to save your business money!
Here is all you need to know about corporation tax relief on R&D projects:
What Are Research and Development Tax Credits?
R&D tax credits are an incentive from the UK government to companies championing innovation. It’s a reward meant to motivate companies to invest more in researching and propelling growth in their fields. They are a valuable cash source for companies to fund their next projects and grow business.
If your project qualifies for research and development credits, the HM Revenue & Customs (HMRC) will reimburse a percentage of the money you spent in funding it. This could be in the two forms mentioned above: tax reduction or cash payment.
If you’re making a tax claim for the first time, it’s possible to apply for relief on your last two accounting periods.
What Qualifies as Research and Development for Corporation Tax Relief?
According to the government, what qualifies as research and development are broad. Projects in all industries within the nation can be eligible, provided they meet the set requirements. But, the primary qualifying factor is that your company’s project must be attempting to resolve uncertainties of a technological or scientific nature.
That means even if your project doesn’t seem to be scientific or technology-related, it could be trying to solve some uncertainty and thus qualify for R&D credit. And it’s good to note that you can even make these claims on unsuccessful projects.
The project you put forward for consideration must relate to your company’s operations. It could either be existing operations or something you intend to start after completing your research. Note that you can also include the work you have undertaken for a client as a project.
What Makes a Business Eligible for Research Tax Credits?
To enjoy R&D tax credits, a business must meet some essential prerequisites. It must be a limited company that is subject to business tax. Also, it must have carried out a research and development project that qualifies for tax relief; and spent money doing so.
Your projects or research and development activities must illustrate the following for your business to get an R&D credit:
You Sought Advancement in Your Field
Your research and development activities must seek to make advancements in your industry. They should not just focus on helping your business. It’s crucial to note that an advance doesn’t mean taking existing technology and employing it in your sector for the first time.
That would not qualify for a research and development credit. But, an innovation could pass as an advance if another company develops it, but it’s still unavailable to the public. If you’re the first to bring it to market and it stands to benefit the whole industry, you’re likely to qualify for tax relief.
There Was Uncertainty
Your company must show that its project set out to eliminate uncertainty about the development or improvement of a product, service, or process. Uncertainty exists when experts in the field cannot say if the project is possible without first having the research done.
Show Your R&D Project Needed Research
In your business, you need to illustrate that your research and development activities required research, tests, and analysis to conclude. Remember to demonstrate how you went about overcoming the project’s uncertainty.
You must also show how you evaluated other options of attaining the desired result. The process of experimentation must have depended on sciences such as chemistry, physics, and biology.
Illustrate That Professionals in Your Field Couldn’t Do It
Your company should show why a professional in your industry could not figure out your advancement. One good reason could be that several previous attempts didn’t succeed. So your company is the first one to go that far.
Professionals who worked on the project can help you explain the uncertainties involved. Those professionals are better placed at explaining the difficulties of solving the underlying research problems.
What Expenditure Qualifies for Research and Development Credits?
Many types of expenses incurred in research and development can qualify for tax relief. Some of the most common ones include:
- Salaries paid to employees for qualified services
- Materials and equipment used in the research and development process
- Research fees paid to contract third parties for any assistance or service needed in the R&D process
- Expenses on using or buying some types of software
- Research fees paid to scientific research organizations or educational institutions
- Payments to test subjects
What Are the Different Types of R&D Tax Relief?
There are different types of R&D tax credits depending on a company’s size, as well as whether a project is subcontracted or not. The two common ones are:
SME (Small and Medium Enterprise) R&D Tax Relief
You can claim for this type of relief if your business has less than 500 staff. It should also have a turnover of lower than 100 million pounds or 86 million pounds in gross assets.
If you’re making losses, you can claim up to 33 percent tax credit on your qualifying R&D expenses. If you’re making a profit, that amount comes down to 26 percent. Most SMEs in the UK make an average claim of over 50,000 pounds each year.
Research and Development Expenditure Credit
Big companies have over 500 staff and a turnover of more than 100 million pounds. Such companies, as well as SMEs who have been subcontracted to do R&D projects by a large company, can file this claim. It gives 11 percent tax credit on the qualifying R&D expenditure.
Take Advantage of Research and Development Tax Credit!
Research and development tax credit can give your business money for reinvestment. By developing new advances in your field and getting paid for it, you kill two birds with one stone!
Contact us today for any help with tax accounting services.