Is your SME eligible for R&D Relief? If you’re spending money on developing new products, processes, or services, you could receive 230% tax relief on your qualifying research and development costs. Read on to find out how…
What is R&D Relief?
R&D Relief is a scheme that the government set up in 2000 to encourage scientific and technological innovation in the UK. It allows companies who have carried out trade-related R&D to claim a reduction on their Corporation Tax liability.
What is R&D?
According to the Department for Business, Innovation & Skills –
R&D takes place when a project seeks to achieve an advance in science or technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D.
There are two R&D Relief schemes
The two schemes through which a company can claim R&D Relief are:
- R&D Expenditure Credit (RDEC).
- SME Scheme.
Any company with 500 or more staff must claim through RDEC.
Companies with fewer than 500 staff claim through the SME Scheme.
While both schemes use the same definition of R&D for tax purposes, the allowable costs and the amounts of benefit a company gets are different, and it’s the SME Scheme that this article is focusing upon.
R&D Relief: The SME Scheme
Under the SME Scheme a company can get 230% relief on qualifying R&D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit. Claims are made via the company’s tax return (CT600).
To claim R&D Relief for your company you need to demonstrate four key things:
- There was a technical or scientific project.
- The project sought to achieve an advance in science or technology through the resolution of one or more scientific or technological uncertainties.
- There were people with appropriate skills and experience working on the project.
- The knowledge required to overcome the technological or scientific uncertainties wasn’t readily available in the public domain.
Acting as a subcontractor?
Another important thing to consider is whether or not your company is “acting as a subcontractor”.
If you’re doing R&D on behalf of another company you can only claim R&D Relief if the contracting company is a large company, and only under the RDEC scheme. If you’re doing R&D on behalf of another SME you cannot claim R&D Relief under the RDEC or the SME scheme.
Ideally you want to be claiming for R&D aimed at unique products, processes, or services, that could potentially extend the overall knowledge or capability in the field of science or technology and not just your own company’s state of knowledge or capability. You can claim even if the project failed to achieve its objective. However, you don’t want to be claiming for R&D aimed at fulfilling a specific client request because you need to avoid a situation where you and a customer could both be claiming for the same R&D!
The 5 questions to answer before claiming
- Does my company have a project?
- Is the project seeking an advance in a field of science or technology?
- Does the advance extend the overall knowledge or capability in the field of science or technology and not just my company’s own state of knowledge or capability?
- Does the project involve an uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge?
- Is my company acting as a subcontractor?
The 4 steps to claiming R&D Relief
- Work out when your R&D activity starts and ends.
- Identify the eligible costs.
- Calculate the R&D ‘enhanced expenditure’.
- Support your claim using the online service to submit details to HMRC.
1/ Work out when the R&D activity starts and ends
The R&D activity starts when you begin working to resolve the scientific or technological uncertainty. The R&D activity ends when you solve the uncertainty or stop working on it. You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.
2/ Identify the eligible costs
These will include:
- Staff – salaries, Class 1 National Insurance contributions, and pension fund contributions proportionate to each staff member’s role in the R&D activity.
- Subcontractors – 65% of the relevant costs.
- Software – licence fees for R&D specific software, and a proportionate share of the cost for other software partly used in R&D activities.
- Consumables – proportionate costs of materials and utilities.
- Clinical trials volunteers – payments made to volunteers involved in clinical tests for R&D projects in the pharmaceutical industry.
You cannot claim for:
- Production and distribution of goods and services capital expenditure.
- Costs of land.
- Costs of patents and trademarks.
- Rent or rates.
3/ Calculate the R&D Relief
For example –
- Total allowable R&D cost: £46,240.
- Multiply by 130%: £60,112.
- Add the two figures (£46,240 + £60,112) to get the total R&D Relief: £106,352 – i.e 230% of the original cost.
Enter the ‘enhanced expenditure’ figure of £106,352 in the correct box on your company tax return (CT600).
The effect of the R&D enhanced expenditure will be to reduce the taxable profit on which Corporation Tax is paid.
4/ Support your claim
You will need to provide a short summary that explains how your project:
- Meets the definition of R&D for tax purposes.
- Looked for an advance in science or technology and aimed to achieve this advance.
- Had to overcome scientific or technological uncertainty, and how it sought to overcome this uncertainty.
- Why this uncertainty could not easily be resolved by a professional in the field.
You will also need:
- The start and end dates of the accounting period relating to the R&D activity – these should be the same dates as the period covered by your CT600 return.
- Your Unique Taxpayer Reference (UTR) number.
- Details of your qualifying R&D costs.
How many projects are you claiming for?
If you’re claiming the credit on one to three R&D projects you will need to provide details of all projects.
If claiming on four or more R&D projects, you should provide detailed descriptions of at least 3 projects (up to a maximum of 10), which between them cover 50% or more of your total qualifying R&D costs.
You should send an email to: RD.IncentivesReliefs@hmrc.gov.uk if you need to provide details on 10 or more R&D projects to cover 50% or more of your qualifying costs.
Writing your R&D summary
One to three projects is the ideal number to write about. Aim to produce a technical summary of around 2-5 pages of A4, which should be enough to satisfy an HMRC inspector. You don’t want to bore or annoy them with too much information but neither do you want to arouse their suspicions with a summary that’s too light on the details.
The best person to help you write the summary is an appropriately qualified technician who was directly involved in the R&D and is able to explain how it is innovative. You will need them to provide further information about the project if HMRC ask for it. Collecting the right data from the right person and providing a straightforward summary to back up your claim is the best way to avoid triggering an expensive HMRC enquiry.
Department for Business, Innovation & Skills –
Guidelines on the Meaning of Research and Development for Tax Purposes
Issued 5 March 2004, updated 6 December 2010.
HM Revenue & Customs –
Research and development tax relief: Making R&D easier for small companies
Issued November 2016.
Research and Development tax relief for small and medium-sized enterprises
Published 23 December 2015, updated 13 June 2019.
Is your SME eligible for R&D Relief?
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