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How To File a R&D (Research and Development) Tax Credit claim

Research & Development or Enhanced Expenditure has big benefits to reducing Corporation Tax, or paying you a Tax Credit in the event of a Loss. In this article we show you how to file with HMRC.

How To File a R&D (Research and Development) Tax Credit claim

Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. Also referred to as Enhanced Expenditure they are a valuable source to reduce CT liability or to receive cash from HMRC if a loss was made. The idea behind R&D is to incentivise companies to invest in accelerating their R&D efforts, hiring new staff and ultimately growth.
To qualify for R&D Tax credits a company must be:

  • Be a UK limited company that is subject to Corporation Tax.
  • Have carried out qualifying research and development activities.
  • Have spent money on these projects using either internal PAYE resources or a Third party.

What is classed as Research and Development

Not all projects are eligible as R&D is aimed at projects that are seeking to advance science or technology. The Key Requirements are:

  • Be seeking an advance in the field of technology or science
  • Be considered commercially innovative
  • Incorporate science or technology that is not readily available in your industry
  • Relate to your company’s trade – you must be intending to use the findings for your business
  • Additionally, your company must not currently be receiving state aid or subsidised expenditure.

What can be claimed and how much Tax credit can you claim?

Currently any cost that is eligible for R&D Tax credit must be related to a 'R&D phase' of the projects life cycle - this could be PAYE costs of resources working on the R&D, equipment directly related to the research and any related third party costs.

The current rate of tax credit available is 130% of the R&D expenditure, therefore since you will also include the cost in the overall operating expenses, the overall impact will be 230% from Corporation Tax Liability. In companies which are yet to be cash generative (potentially in start-up phase) and therefore making a loss you may be entitled to a R&D tax credit payment from HMRC. The exact amount of R&D relief that you can receive and the actual amount you can claim back as a Tax Credit is related to many factors, you can use our Research and Development Calculator to assess the impact of R&D relief.

How do you claim?

Although the process may seem complex to the inexperienced; it's actually relatively straight forward, with many people in Micro & Small business sizes put off by not knowing what can be claimed and how to file the Digital Filing return to HMRC. The Easy Digital Filing CT600 template has sections specifically for R&D. The following steps guide you through the process from start to finish.

Step 1 - Identify R&D work/Projects that you are undertaking

Clearly the type of company you are and what your activities relate to will dictate if you are able to take advantage with R&D, however, although the headline are companies in the tech or scientific space, many other industries also carry out R&D. For example companies which rely on Information Technology may perform research to build a system which will be a game changer and advance their capabilities.

Once you have identified a project or package of work that looks like R&D look at the 'problem' or challenge and perform the following tests:

  1. Will the work perform a Technical advance - will the solution provide new technological functionality for you
  2. Are there technical uncertainties in the work - are you going into the work with 'unknowns'
  3. Will you be able to describe how the uncertainties are overcome
  4. Can you explain why the uncertainties could not just be resolved by a competent professional

We would recommend that you use the headings above in your R&D report - this is the supporting document which you attach as part of your R&D submission when Filing. In our experience most companies create a report of around 4-6 pages detailing the project and the rationale against each of these tests. Note that this report needs to be converted into the pdf format.

Step 2 - Keep a note of all costs and time spent on R&D

You may be fortunate and have a ring fenced R&D team, however, it's likely that you will have fungible resources that work on other (non-R&D) activities. You may also have multiple R&D Projects which will require a separate R&D report for each.

If you have a time booking system you can use that so that people allot hours. Otherwise you may need to work out a proportion of time using your justifiable discretion.

Step 3 - Make a CT600 return include R&D amounts & attach the R&D report(s)

When your accounting year has completed and you are ready to file, create and open your CT600 Filing and select the section "Research & Development(R&D) / Creative Enhanced Expenditure" When you select yes the supplementary section will be visible in the section navigator.

Research and Development CT600 Filing

Add a R&D item from drop list and enter amount of R&D

Open the R&D section and add a new R&D item, note that you can add multiples if you have performed a number of R&D projects (whilst you can sum all the projects into one cost - it's better to be as transparent as possible). In the example below we are claiming £653,826 as related to our R&D project for this tax year.

Input Research and Development costs

Attach your R&D supporting documentary evidence

As mentioned above you will need to create a report detailing your R&D efforts. Typically this will have been detailed as your R&D was performed. Normally it takes around a day to create this report. Once you have converted it into pdf form the supplementary sections add "Supporting Documents" and attach/upload the file.

Attach R&D Report to CT600 Filing

Review your R&D costs against your other return inputs

In our example below the company had £2,500,000 of income, with £1,200,000 of expenses (which already include all costs including R&D ). The R&D element also been added as above to R&D resulting in a R&D credit of £849,973. Research and Development, R&D Worked Example

This has reduced the CT liability by the 130% fo the R+D costs - £849,973 (653,826 * 1.3) and now resulted in total CT to pay of £85,504.94. If we had not claimed R&D then our Taxable Turnover would have been £1,300,000 (2,500,000 - 1,200,000) and at 19% CT that's a whopping £247,000 so claiming for R&D has saved £161,495.06

Note: If you made a Loss during the year, which is common in the start-up phase of a company, you will be able to decide to either take the loss forward, or essentially cash it out as a Cash amount paid directly by HMRC into your company's bank account. If you need to do this, you should enable the payments and repayments section, add your company bank account details and set the repayments switch to yes, where the amount will be calculated for you.

Research and Development, R&D Worked Example

You can use our R&D Online Calculator to find out how R&D Tax relief can reduce your CT liability, potentially pay you a tax Credit if you are Loss making and help your business's cash position.

This article is information only and has been prepared for general guidance on matters of interest only, and does not constitute legal, accounting, tax, investment or other professional advice or services. You should not act upon the information contained in this article without obtaining specific professional or legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article, and, to the extent permitted by law, Comdal Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.