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