R&D Tax Credits - It's Not As Difficult As You Think

Many companies don’t claim the R&D tax credits they’re entitled to because they think the claim process is too difficult, or the criteria for determining what counts as R&D are too complex. Here’s some good news: claiming R&D tax credits is not as difficult as you think. Once you understand what activities count as R&D, and what costs associated with R&D activities are eligible, making your claim is quite straightforward.

What is the R&D tax credits scheme about?

The R&D tax credits scheme is all about encouraging companies to spend money on research and development by allowing them an extra discount on their Corporation Tax liability. Since the scheme began in 2001, HMRC has returned over £21 billion to the economy, and it currently processes around 40,000 claims each year.

There are in fact two UK schemes for R&D tax credits (or to give the UK scheme its proper title, R&D tax relief), depending on the size of the company making the claim. The large company scheme is for organisations with over 500 employees, counted at the group level. The large companies’ scheme, the Research and Development Expenditure Credit (or RDEC) gives a noticeably lower return but large company R&D projects are usually pretty big to start with. The small companies’ scheme for R&D tax relief is far more generous.

Step 1: What companies are eligible?

Any company that is liable for UK Corporation Tax can submit a claim for R&D tax relief. The company must be a trading company (not a dormant company) and it must be a going concern when it makes the claim and when it receives any benefit

Step 2: What activities count as R&D?

HMRC uses the UK government’s own definitions to determine what sort of activities qualify as R&D for tax relief purposes. Your work must be in a field of science or technology, and it must be aiming to make an advance in science or technology, or be an attempt to resolve a scientific or technological uncertainty. While this definition does exclude some activities, it doesn’t limit R&D to any particular industry. If you can show that your work is attempting to make an advance in the science and technology of your industry, or to resolve a scientific or technological uncertainty, you are entitled to claim R&D tax relief. You should also be able to show that the R&D work you want to claim for was a distinct project, with defined start and end dates, and was separate from the normal course of production activities in your business.

What about software development?

In October 2018 HMRC published clarifications about how it handles a claim for R&D tax relief relating to software development projects. This guidance emphasises that not everything that a commercial software company might refer to internally as “R&D” would qualify under the definitions of R&D for tax relief purposes. Only those parts of a software project which are aiming to make an advance in technology, or to resolve a technological uncertainty should be included in a claim. Bug fixing, routine updates, and user acceptance testing are examples of activities that would not qualify under HMRC’s definitions. The new guidance also reiterates that once the advance had been made, or the uncertainty had been resolved, the project ceases to be R&D for tax relief purposes.

Step 3: What costs can be claimed for R&D tax relief

If you’re a small company, you can include the following types of costs in your claim for R&D tax relief:

  • Staff salary costs, including Employer’s National Insurance, and any company pension contributions
  • Subcontractor costs (usually limited to 65% of invoice value)
  • Externally provided workers (agency staff) (usually limited to 65% of invoice value) Materials consumed in creating prototypes
  • Licence costs for software used for R&D
  • Some kinds of expenses directly incurred by staff and reimbursed by the company.

All of these costs can be claimed in proportion to their relevance to your R&D projects. For example, if a member of staff spends 40% of their time on R&D you can include 40% of their costs in your claim.

If you’re a large company only the following types of costs can be included in your claim for R&D tax relief:

  • Staff salary costs, including Employer’s National Insurance, and any company pension contributions
  • Materials consumed in creating prototypes
  • Licence costs for software used for R&D
  • Some kinds of expenses directly incurred by staff and reimbursed by the company.

Step 4: Putting your claim together

Once you have established what activities qualify as R&D, and what associated costs are valid, you can calculate the amount of tax relief due to you. You could just enter the relevant amounts in your Corporation Tax return, but in that case HMRC could well come back and ask for more information before approving your claim. They are liable to ask you to explain the work you had done, and why you consider it to be R&D. It’s good practice to answer those questions in advance by submitting a descriptive report alongside your claim.

Step 5: Make sure you claim on time

You can put in your claim for R&D tax relief as part of your regular Corporation Tax return (CT600), which you need to submit within 9 months and 1 day of the end of your accounting period. However, if you’re not ready to submit your claim for R&D tax relief at that time you have until 2 years after the end of your accounting period to submit your R&D claim in the form of an amended Corporation Tax return.

Your best shortcut to a successful claim for R&D tax relief

In this article, we have tried to explain the basic principles of making a claim for R&D tax relief and to show how the rules and the procedures are not as difficult as you might have thought. It does take some time to put a claim together, and it might be a good idea to ask an expert to help you get your claim right the first time.

If you'd like more information on R&D tax credits, simply get in touch:

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David Farbey MA, FISTC, FRSA
Author David Farbey MA, FISTC, FRSA David Farbey MA, FISTC, FRSA
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Myriad Associates helps businesses maximise tax reliefs and secure R&D grant funds. We specialise in R&D Tax Credits, Video Games Tax Relief, Innovate UK grants, Horizons 2020 grants, and Research and Development Capital Allowance Claims.

  • Submitting R&D tax claims since 2001
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  • Over £100m claimed and counting
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  • In-house technical, costing and tax experts
  • Member of the Research and Development Consultative (RDCC) committee

Meet some of the team behind Tax Cloud

Barrie Dowsett Barrie Dowsett ACMA CGMA Chief Executive Officer
David Farbey David Farbey MA, FISTC, FRSA Technical Consultancy Director
Lisa Waller Lisa Waller CTA, ACCA R&D Tax Manager
Lauren Olson Lauren Olson MA, MISTC Senior Technical Consultant