Research and Development Relief FAQ

scientists conducting experiment

To support the science and technology industry in the UK the Government introduced what’s known as Research and Development relief. The aim of the relief is to provide companies with tax benefits for investing in research projects that may lead to significant advances in their field.

Interestingly the relief can be claimed even if the project proves unsuccessful providing certain criteria are met.

How much is R&D Relief?

For SMEs (typically companies with less than 500 employees), the relief enables you to claim a corporation tax deduction of 230% on qualifying expenditure.

Let’s look at how that would work.

For example; Company A has revenue of £500k, expenses of £400k and pre-tax profits of £100k with an estimated Corporation Tax liability of £19k.

Company A has spent £20k on developing its own range of products but these development costs don’t qualify for R&D relief.

The £20k development costs are however a legitimate business expense and have been included in the total expense costs of £400k and a standard 100% of cost deduction has therefore been made prior to calculating the pre-tax profits.

Company B has the same revenue, expenses and development costs however its £20k qualifies for R&D Relief. Here’s how that would affect their Corporation Tax liability.

Company B has £100k in pre-tax profits after including the £20k of development costs just as Company A did. Now Company B can claim a further 130% of the £20k due to R&D Relief.

As the original £20k spend had already been included in the deductible expenses this amounts to a deduction of 230% of the actual costs incurred.

Company B’s pre-tax profit is adjusted like this; £100k – £26k(£20k*130%) = £74k pre-tax profit resulting in a corporation tax liability of £14.06K

Thanks to R&D Relief Company B’s corporation tax is reduced by almost £5k yet they spent no more on development than Company A.

What qualifies for R&D Relief?

For this I’ll take the text directly from HMRC;
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology.

To get R&D relief you need to explain how a project:

  • Looked for an advance in science and technology
    • Your project must aim to create an advance in the overall field, not just for your business. This means an advance can’t just be an existing technology that has been used for the first time in your sector.
      had to overcome uncertainty
    • You should be researching or developing something that isn’t known to be scientifically or technology feasible when you make or discover it.
  • Tried to overcome this uncertainty
    • You should show that the R&D needed research, testing and analysis to develop it.
  • Couldn’t be easily worked out by a professional in the field
    • You should explain why a professional couldn’t easily work out your advance. You can do this by showing that other attempts to find a solution had failed.

Not all Costs can be included in your claim

  • Only 65% of any sub-con costs can be reclaimed
  • You can’t include any costs for
    • Capital Expenditure
    • Land
    • Patents and Trademarks
    • Rent or Rates

How do you make a claim?

You can claim R&D Relief up to 2years after the end of the accounting period to which it relates. You’ll need to clearly identify all project costs and write supporting evidence as to why the project qualifies for R&D Relief.

The additional 130% tax relief is then claimed via a corporation tax return submission as normal.

Summary

R&D relief offers huge financial benefit to companies genuinely pushing the envelope in their field however because of the enormous benefit available the number of “dodgy” claims made has been enormous.

Many readers will have been contacted at one point or another by agencies specifically set up to enter claims. They often charge 50% of the saving knowing that by the time any challenge is raised by HMRC they will be long gone leaving the business owner to repay HMRC 100% of the tax plus interest.

How to Claim for a Home Office
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