In this blog, we explain what Research and Development Tax Relief is, whether or not your business is eligible and how we can help you make a successful claim.
Making a claim for Research and Development Tax Relief can be an important way for businesses – in any sector – who are involved in research projects to reduce their tax liability.
The Research and Development (R&D) Tax Scheme was introduced into UK Tax Legislation in 2000 with the aim of encouraging businesses to invest in innovative activities. The scheme offers R&D tax relief for businesses who meet criteria for advancing science and technology, a business can benefit from a reduced corporation tax liability or by giving tax credit repayments if a loss is made.
The government introduced this scheme to boost the investment base within the UK as many countries around the globe such as France and Canada have already established schemes to promote R&D. At the time of the scheme’s inception, only 10% of eligible businesses were claiming the relief however within the past year, the number of claims has increased drastically from £90 million in claims to £425 million.
Research and Development Explained
A Research and Development claim can be made if a project “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability”.
In more simplistic terms, the project must relate to the business’s trade in question and it must create an advancement in the overall field, not just for the business. The business can’t use existing technology that hasn’t been used in the sector before but a claim can be made if another company has already made an advancement but it is not publically available.
A more detailed list of criteria can be found on HMRC’s website.
Is the Business Eligible for Research and Development Tax Relief?
There are two types of schemes available to businesses, however, the choice of the scheme depends on the size of the business.
If the business has equal to or less than 500 employees, a turnover of up to £100 million and a balance sheet less than £86 million then it should apply for the Small or Medium-sized Enterprise (SME) Scheme. With this scheme, a business who applies for R&D tax credits can claim 230% of their qualifying costs. This means that for every £100 of costs spent, a business can reduce its corporation tax bill by £130 on top of the £100 already spent.
If the business is making a loss then the business can claim a tax credit of 14.5% of the surrendered loss. If the business does not meet the specification above they can claim for the Research and Development Expenditure Credit Scheme which offers 11% of the business’s qualifying costs.
How to Make a Successful Claim / Why it Hasn’t Been Succesful
With the scheme being so generous, it is difficult to understand why so few eligible businesses are claiming Research and Development Tax Relief. One reason may be due to the lack of clarity around what constitutes as qualifying expenditure and leads to businesses assuming they do not qualify for relief or failing to claim as much as they could. Another being that a business may fail to keep accurate and consistent records of their expenditure during R&D which leads to a weak and incoherent claim.
If HMRC were to suspect a false claim, penalties can be issued. A “careless” error can receive a fine of 30% whereas a “deliberate” mistake can be up to 70% and is another deterrent for businesses making claims.
Successful R&D Tax Claims
To make sure a claim is successful it is imperative that a business can prove to HMRC that the R&D project meets the criteria in full, and to make sure detailed records are kept throughout the R&D project.
Aston Shaw’s team of friendly tax specialists have made many successful Research and Development Tax Relief claims for clients in a variety of sectors. Please review our R&D tax service page for more information about how we can help you, or if you would like our help with making a claim please do not hesitate to get in touch.