Could your firm get tax relief on R&D?

INNOVATIVE BUSINESSES COULD QUALIFY FOR CREDITS

IT’S not only scientists in laboratories who are eligible for Research & Development (R&D) tax credits. BKPS has submitted successful R&D claims for engineering companies building prototype tunnelling equipment, software developers building new platforms and a heart surgeon developing new stents and heart pumps.

Other successful claims have included construction companies developing new cladding systems, vegan food producers trying to make fake meat out of mushrooms and dentists developing new dentureproduction systems.

Read on to see if your company qualifies for R&D tax relief.

R&D tax credits were introduced for small & medium-sized enterprises (SMES) in 2000. The whole world benefits from innovation in science & technology and the R&D tax credit scheme was the UK Government’s idea to encourage companies to invest in scientific and technological advances. A company qualifies for the SME R&D scheme if they meet these criteria:

■ Fewer than 500 employees AND

■ A turnover of less than £100 million OR

■ Gross assets of less than £86 million.

In order to attract more investment in innovation in 2002, the Government opened the R&D scheme up to large companies. In February 2020 the Government pledged to increase public investment in R&D to £22bn annually by 2025.

Due to the introduction of large companies to the scheme there are two R&D tax credit schemes in operation:

1. Small to medium-sized businesses use the (SME) scheme

2. Larger companies use the Large Company scheme (changed to the Research & Development Expenditure Credit (RDEC) scheme in 2016).

The technical aspects of both schemes are the same, but a couple of the cost categories are different.

■ Only limited (Ltd) companies can claim R&D tax credits through their annual tax return (CT600).

■ You are allowed to submit an amended CT600 12 months after the file date (effectively two years after your company’s financial year-end date). So, if you think you may have a claim, you still have time to amend your latest CT600S.

■ You qualify for either R&D scheme if:

– your company aims to advance science or technology

– the project involves technical uncertainty

– staff working on the project are qualified by training or experience

■ HMRC have committed to processing an R&D claim and pay the credit within 28 days

■ HMRC reserve the right to question a claim or open an enquiry (currently less than 2 per cent of claims are questioned by HMRC)

■ If HMRC deem a claim to be ineligible, they can request the tax credit be repaid to HMRC and penalties may be applied.

R&D tax credit calculation

Go through your financial accounts identifying eligible costs for staff, subcontractors, materials, utilities, software and apply them to your claim.

Over the years on average 72 per cent of claims were under £50,000 of eligible costs, so let us use £50,000 eligible spend for our example.

■ ■SME R&D claim

Original costs – £50,000

R&D relief @130 per cent – £65,000 Total relief (230 per cent) – £115,000

Therefore, with no R&D claim you would have tax deductible costs of £50,000 but with the R&D tax claim you would have an additional R&D tax credit of £65,000. With an R&D claim you would save (£65,000 @19 per cent) £12,350 corporation tax.

Should you opt for a cash rebate instead, you would get a (£65,000 @14.5 per cent) £9,425 cash rebate.

This is sometimes useful where you have made a loss or you need to improve cashflow.

RDEC claims

RDEC claims are usually for large companies but sometimes SME companies can fall into the RDEC regime if certain types of grants were received or certain types of subcontractors used.

Original costs – £50,000

R&D relief @13 per cent – £6,500 (RDEC relief @12 per cent prior to April 2020)

If the RDEC company made £50,000 taxable profit, then with no RDEC claim the corporation tax liability would be (£50,000 @19 per cent) = £9,500.

But with the RDEC claim the tax liability would be:

Taxable profit – £50,000

Add: RDEC relief – £6,500 Amended taxable profit – £56,500 Taxed @19 per cent – £10,735 Less: RDEC relief – (£6,500) Corporation tax due – £4,235

A tax saving of (£9,500 - £4,235) = £5,265

This article is only intended to give an overview of the R&D scheme. The rules are complex so you should always seek professional guidance prior to submitting an R&D claim.

Should you feel that you may have an R&D claim, contact your accountant. Should your accountant not do R&D claims, contact BKPS and we will assess whether you have a claim free of charge.

Should we feel you have a claim, we will work with you and your accountant to process your R&D claim.