What are Research and Development (R&D) tax credits?

For each £1 spent on R&D related expenditure your business will be treated as it had spent £1.87 for saving corporation tax, making an earlier claim this could be as high as £2.30 for every £1 spent.

Research & Development (R&D) tax relief is an incentive scheme designed to encourage investment by UK limited companies in technical advancement and innovation. The aim is to help keep UK businesses at the forefront of productivity and innovation.

If your company is engaged in a project that is developing technology, ways of working or knowledge (that you cannot simply buy off the shelf) then you could be able to make an R&D claim and get some extra tax back.

What tax can I get back from R&D?

R&D allows a company to uprate applicable costs for tax relief. Up until the 31 March 2023 your company can claim back an extra 130% in applicable costs. From the 1 April 2023 the uplift on applicable costs will reduce to an additional 86%. Whilst this isn’t as good as it has been this can still be very lucrative especially considering that corporation tax rates increase from that date.

Following the end of your accounting year, you have two years to submit an R&D claim for that period.

For loss making companies this credit can be exchanged for a payable tax credit. While the saving is slightly less this way it means your business can get a cash injection even if it has not paid any corporation tax. This treatment is a payable 14.5% tax credit for the value of the losses “surrendered” (i.e., no longer held to offset future profits). From 1 April 2023 this credit will reduce to just 10% of the surrendered loss.

Example of R&D up to 31 March 2023

For a £10,000 of R&D applicable expenditure your company could get an extra £1,885 in tax back

Here’s how that would work:

  • £10,000 of qualifying R&D expenditure
  • £10,000 x 130% = £13,000 enhanced R&D expenditure
  • If taken as tax relief: £13,000 x 19% = £2,470 tax relief (to offset against current year profits or carry back/forward)
  • If taken as tax credit: £13,000 x 14.5% = £1,885 tax credit (assuming there are no existing losses present)

Example of R&D for year end after 1 April 2023

For a £10,000 of R&D applicable expenditure your company could get £885 in tax back

Here’s how that would work:

  • £10,000 of qualifying R&D expenditure
  • £10,000 x 86% = £8,600 enhanced R&D expenditure
  • If taken as tax relief and profits over £50,000: £8,600 x 25% = £2,150 tax relief (to offset against current year profits or carry back/forward)
  • If taken as tax credit: £8,600 x 10% = £860 tax credit (assuming there are no existing losses present)

What sectors can benefit from R&D tax relief? 

A common misconception I hear from clients is that there is an assumption that to claim R&D tax relief you have to work within a scientific field, but this could not be farther from the truth. The relief can be for any project, in any sector, provided you can prove:

  1. It represents an advancement in technology (or science)
  2. It is not a product, knowledge or skills that can be bought on the open market
  3. The project is intended to create a commercial benefit
  4. There is uncertainty that the project will succeed

To strip it back, the initial two questions I always ask anyone who thinks they may have an R&D claim are:

  1. Did you have staff working on a project?
  2. At multiple stages did you think the project would fail?

From there we can asses the technical aspects of if a claim is possible.

If you and your company has, at any point within the last 2 years, undertaken a project that fits any of the following you might be able to make a claim:
  • Created, adapted, or designed software, machinery, or systems to break new ground in your industry or to serve a new purpose
  • Undertaken a project that had some inherent risk of failure or where the outcome differed from the initial outline
  • Completed work internally or for customers where innovation or bespoke design was required
  • Made improvements or necessary adaptations to a physical or digital product or service
  • Advanced or adapted the standard practice in completion or delivery of services within your industry
  • Patented or trademarked any aspect of your product or service

If any of the above sounds applicable to your company, give us a call on 01474 853 856 or email enquiries@a4g-ll.co.uk for a free R&D consultation. 

team of r&d innovators

What types of businesses have you obtained relief for?

We have worked with a wide variety of companies across many industries in the past.

Here are some examples of the diverse range of industries we have helped complete R&D claims for:

  • Construction and Architecture
  • T and Software
  • Vehicle Technology
  • Professional Services
  • Manufacturing
  • Hospitality and Entertainment
  • Design and Engineering Services
  • Healthcare and Medicine
  • Veterinary Practices

What types of expenses are claimable? Are there any restrictions on what I can claim?

There are a wide variety of expenses that can be claimed in relation to your R&D projects.  The most common, and often most significant costs, is that of staff salaries (including directors’ salaries). Staff costs must be apportioned to the time spent on R&D projects.  This will also include the Employer’s National Insurance and Employer’s Pension Contributions related to the apportionment of their work.

Other allowable costs are as follows:

  • Material costs at full value so long as they are expended directly in the pursuit of your project objective
  • Software and I.T Hardware costs, apportioned to match the degree to which they were purchased with the intent of use within your R&D project
  • Subcontractor costs are claimable at 65% of their total value so long as they spend the entirety of their subcontracted time on your R&D project
  • Consultancy costs are treated in the same way as subcontractor costs so are claimable at 65%.
  • As of the 1st of April 2023, you will be able to claim for the cost of web hosting and cloud data sets so long as they are wholly in respect of your R&D project
  • Travel, carriage and light and heat costs are claimable, again on an apportionment basis to which they directly relate to your R&D project

How do R&D tax credits work when I don’t pay Corporation Tax?

During challenging times in business there are two options:

  • Defence, by reducing spending and cutting back

Or

  • Attack and increase marketing and development of your business or explore options for diversifying the business

Over the tough times of recent years’ we have been amazed by the ingenuity of our clients and we have helped support them by assessing these projects to discover if they are applicable for R&D tax credits.

Often these clients have been using reserves of the business during periods of low or no profits. If you make an R&D claim and the business is making losses then you can surrender the loss made and receive a payable tax credit. Up to 31 March 2023 the tax refund is paid at a rate of 14.5% of the loss surrendered. However, from 1 April 2023 this will be reduced to 10%.

When deciding how to apply the R&D tax relief it is important to discuss this with us as your accountant. We will always review what is the best option for your business. While the cash benefits of receiving the payable tax credit is appealing in the short term sometimes longer-term planning can highlight a more significant tax saving when utilising alternative treatments.

If you don’t take the tax credit then the losses could be carried back to the previous year, if there was tax due in that period, or carried forward and can offset profits when they are higher and when the tax rate you pay may be higher.

It is a balance between maximising the refund and maximising the speed at which you receive the cash.

We offer free R&D discovery meetings for all of our clients. We will never start a claim unless we think you have R&D. To book a discovery  meeting, email discovery@a4g-llp.co.uk.

When can I expect my money from HMRC?

There are effectively three ways of claiming back the tax credit:

  1. Amending a company tax return to to get a refund of taxes previously paid
  2. Including an R&D claim on a company tax return before the tax for the year is due
  3. Claiming the payable R&D tax credit for loss making businesses
  4. HMRC have also been known to offset the R&D credit against of tax liabilities owed

Route 1, via amended tax returns, is the most common however, the most cash effective option is route 2, where rather than getting a refund you restrict the amount of tax paid in the first place. This does however require a lot of planning a work to take place alongside your annual accounts.

HMRC process claims via the CT600, Company Tax Return, processes. Once submitted, HMRC usually take six weeks to process and trigger a refund.  The refund should then be paid in around two weeks, however sometimes HMRC may send the refund for additional checks with another HMRC department which can add an additional two to four week delay.

At some periods HMRC may process claims more slowly. Notably when there are peak submissions or when there is political pressure for them to ensure no fraudulent claims get through.

I think my company qualifies for an R&D claim, how do I maximise my relief?

There are several ways to maximise the relief you can receive from the R&D scheme, A4G are able to offer extensive, bespoke advice in this regard to suit your business and your circumstances. If you would like to know more about the advice we can offer please let us know.

As a few pointers you might want to consider the following:

Like most things, an R&D claim is best considered ahead of time and that way you can set things out correctly to aid with the claim, and prove the figures to HMRC should the need arise.

You should keep a log of the time staff spend on a project to maximise and prove the apportionment of their costs to the project.

If you as a director are driving an R&D project then it could be tax advantageous to increase your salary during the life of the project (assuming you normally receive a small salary with most of your income from dividends).

Keeping a project log of the goals, workflow plans, issues encountered and where parts of the project fail documenting what failed and how this changed the project after this point are all vital elements it would be beneficial to keep track of.

Keeping a note of all consumables used for the project is also essential so that these costs can be segregated from those of the normal business.

Additionally, any equipment or assets purchased for the project should also be noted I the project file to ensure these are included in the claim.

Now that I understand R&D Tax Relief, why should I engage A4G to complete my claim?

A4G maintains a dedicated R&D tax department, headed up by specialists who have over 15 years experience in tackling a wide variety of complex claims across a breadth of different industries, and regularly deal with sums of relief all the way up to £1,000,000.00.

We have developed a comprehensive yet concise end to end process designed to seamlessly take our clients from the initial fact-finding stage all the way to submission to HMRC and beyond. We pride ourselves in our dedication to ensuring every claim we complete is supported by as much evidence that can be found to tackle any queries before they even arise.

Additionally, our process is designed to limit the need for any involvement from you.

Following our initial meeting and an open discussion regarding your business and your projects, we tend to be able to complete your claim with very minimal input from you or your staff until such a time as we require some final details or need your review prior to submission to HMRC.

As at the time of writing, we have successfully obtained over £2,000,000 of R&D tax relief for our client base.

If you would like to learn more about our process and get the ball rolling in making a claim, we offer a free R&D Discovery Meeting where we will discuss the process with you in depth, explore how R&D can best serve your business and can quickly identify the likelihood of making a successful claim.

Email us at discovery@a4g-llp.co.uk, give us a call on 01474 853 856 or use the enquiry box at the button below to book your free R&D discovery meeting.

Find out more

Other posts of interest

See more articles