What Is the R&D Tax Credit and How Can You Claim?

30 May 2019

Do you qualify for the R&D tax credit?

This credit facility enables businesses to receive a cash payment or corporation tax deduction from HMRC to assist in production or service development costs.

With R&D tax relief, renovating or fuelling your business growth will be quite natural. The tax guarantees that you have a competitive cash flow to keep your business doors open for the next financial year. However, not everyone qualifies for this credit with HRMC.

If you are new to the business industry and you wish to know what is HMRC R&D tax credits and their impact in your business, read on and learn more. Below is exclusive information that will guide you on necessary procedures to qualify for the credit and others.

What Is an R&D Tax Credit?

What is R&D Tax Credit?

Research and development (R&D) tax credit is an incentive from the government designed to reward companies in the UK that invest in innovation. It is an important source of money for businesses to hire new staff, invest in growing their R&D, and ultimately growing or expanding the business.

R&D also works as a bridge that connects the government with small businesses for the interest of other citizens. Additionally, R&D credits are permanent, and some companies will also include it in their financial reports under the tax-planning strategy.

The primary purpose for this tax is to ensure technical jobs are running smoothly and innovation is established throughout the economy. Therefore, this credit is more expansive than what is realized by business owners.

Importantly, it accommodates numerous industries and activities from diverse fields, which makes it an all-inclusive credit for both small and major corporations.

Who Qualifies?

With the increasing rate of business formation, qualifying for a tax credit is becoming pretty difficult for small business. However, there is still hope to qualify and receive funding from the government if your business does any of the following.

  • Improves or develops upon existing software and prototypes
  • Designs or develops new processes or products
  • Enhances existing processes or products

If your business operation revolves around the above areas, getting a government boost will be quite easy for you. However, even with all the credentials to certify that an organisation qualifies for the credit, for you to receive the boost, you must claim it.

In other words, research and development tax credit is for all sizes of businesses and not the major corporations with research labs. Therefore, a businesses startup can also access and benefit from these government-sponsored credits to build their organisation into more significant heights.

How to Claim

When it comes to claiming R and D tax credits, there are more factors to consider. The tax relief is open to claiming in both current and prior tax years, therefore, ensuring that your company’s documents are ready is essential.

With supporting documents that indicate the R&D activities in an organisation, you automatically become legible to claim the credit in both situations.

However, as a taxpayer, it is contemporaneous to document and evaluate your research activities to establish the amount allocated for each research activity. Although it is possible for one to give an estimated research expense, having a factual basis for the assumption in creating the estimated cost is required.

Additionally, all your documents must tally, and every calculation should have the same results to ensure you qualify for the credit.

If you are unsure of what documents you require to qualify or claim the credit, here is a list of the documents:

  • Project list
  • Project notes
  • Payroll records
  • General ledger expense detail and
  • Other documents that a company produces in the regular course of business.

Businessman on blurred background holding hand drawn question marks

On top of the records, it is important to back it up with employee testimony to form a basis of tax credit claim. This will make the process for this comprehensive service quick, and your company can receive the entitled value.

What Costs Qualify for R&D Credit?

A treasury spokesman shows that 83% of R&D tax claims come from small and medium-term enterprises.

When putting your records together for R&D, you will realise that not all expenses that an organisation meets qualify them for the credit. Thus, before you start claiming, ensure to put all your expenditure under scrutiny to ensure that you are eligible for the claim.

Types of expenses that qualify for the R&D tax credit include:

  • Paying freelancers and subcontractors
  • Staff salaries
  • Pension and NIC contributions
  • Consumables and working materials
  • Software development, and
  • Payments to clinical trials.

If your documents indicate such expenses, then you are in the right direction to claim R&D credits.

Therefore, even if a company does not meet its tax income contributions each year, it can still qualify. However, this exception is only guaranteed to start up a business for a period of five years.

Can R&D Tax Credit Offset Alternative Minimum Tax?

The R&D credit has made it possible for small business to grow in all dimensions. If for instance, a company is struggling to maintain its ground in the corporate industry, due to overdue tax payments. It’s easy to transfer R&D credit into offsetting such tax back loads.

Additionally, the credit helps in minimising the tax liability from the corporate ATMs.

Alternative Minimum Tax Acronym

R&D Tax Credit Supports Businesses and Ensure the Innovation World Continues to Grow

With these credits benefits, any taxpayer can venture into the business industry, and continue to improve the economy in corporate areas.

Additionally, when you are in good terms with the government. Securing such advances and other exemptions is quite easy. When you also choose to venture into business without competitive startup capital. If your records are clear, you can make a total deduction of tax relief up to 230%.

However, if you are not sure how to claim the credit or even know if you qualify, you don’t have to worry.

Check out our FREE R&D Consultation service ; find out how you can get professional assistance in R&D tax credits.

Our friendly team will take you through several steps to ensure you understand all the basics and keep your rating with HMRC clear.

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