If your company is carrying out innovative scientific or technological work, you could benefit from research and development (R&D) tax relief.
Over the last decade, this relief has become much more accessible to smaller businesses, with claims under the SME R&D scheme rising from just 1,860 in 2000/01 to 52,160 in 2018/19.
In total, £5.3 billion was claimed for 2018/19 as of 30 June 2020, corresponding to £35.3bn in expenditure.
To claim relief through the scheme, you’ll need to complete two main steps: working out your enhanced expenditure and entering it into your company tax return form, then using HMRC’s online service to support your claim.
This second step shouldn’t be overlooked – HMRC has a very specific definition of R&D, and you need to use this opportunity to show your project meets it.
To put together a compelling R&D claim that gives you the best possible chances of qualifying, it’s well worth putting the time in to understand what HMRC is looking for.
Does your project count as R&D?
For the purposes of tax relief, HMRC defines R&D as work that’s “part of a specific project to make an advance in science or technology”.
It must also be related to your company’s trade, although this could be one that you intend to start up as a result of your R&D work.
It’s also important to be able to show your project needed to overcome uncertainty to succeed.
Your project could be about creating a new product, process or service, making improvements to an existing one, or trying to solve a technical problem, for example.
In any case, your focus should be on scientific or technological innovation. Commercial or sector-specific innovation won’t count, so make sure you’ve thoroughly researched the work that’s been done across the field as a whole.
Finally, keep in mind that purely social sciences like psychology, sociology or economics do not qualify for R&D relief.
Putting your claim together
If you’re an SME and this is the first time you’ve made an R&D claim, you can apply for advance assurance.
If accepted, this gives you a guarantee that any claims made in the first three accounting periods will be accepted, as long as they’re in line with what you discussed and agreed with HMRC.
After you’ve submitted your claim through your full company tax return form (CT600), you can use HMRC’s online service to support it – or talk to us, and we can handle this on your behalf.
In particular, HMRC will want to know:
- What advance were you seeking to make? This isn’t the same thing as the end product – try to focus on the scientific or technological questions you were looking to answer instead.
- What were the uncertainties you encountered? Make sure what you’re talking about really counts as ‘uncertainty’. If an expert could look at all available evidence and still not know whether something is possible and how it might be done, then a scientific or technological uncertainty probably exists.
- How and when were they overcome? Talk about the methods used during the project to overcome the uncertainty. This doesn’t have to be in a lot of technical detail, but should show it wasn’t straightforward.
- Why couldn’t a competent professional have easily resolved the uncertainty? You might be able to refer to examples of professionals who have tried and failed to solve the same problem in the past. Or you could outline the expertise, qualifications and background of the people leading your project and have them explain why it wasn’t easily deducible.
In general, a good approach is to consult the people directly involved in the work before you write up your claim, as they will have the best understanding of the scientific or technological problems involved in the project.
Your claim should also include a breakdown of the expenses that qualify for relief. This might include staff costs, both for your own team and any external or subcontracted work, as well as consumables, software, trials, prototyping and independent research costs.
You can’t get relief for capital expenditure under the R&D schemes, however, or for production and distribution costs.
What might disqualify you from R&D relief?
Before you start your application, make sure you don’t fall under any categories that exclude you from the relief altogether.
One that sounds basic, but is easy to miss if you’re not familiar with the scheme, is that only companies are eligible: if you’re a sole trader, you can’t benefit from R&D relief as it applies to corporation tax only.
You should also make sure you understand which type of relief you might be eligible for. There are two separate schemes: SME R&D relief and the research and development expenditure credit (RDEC).
Companies are SMEs for R&D relief purposes if they have fewer than 500 employees and either a turnover of less than €100 million or a balance sheet total under €86m.
If you don’t meet these criteria, or if your company is subcontracted to do R&D work for a larger company, you might need to apply for the RDEC instead.
Another thing to consider is that if you’ve received certain other state aid reliefs, including those available to the creative industries, you can’t claim SME R&D relief on those same costs.
And if you’re planning to claim for work that’s already been done, be aware that the time limit for R&D claims is generally two years from the end of the accounting period the expenditure was made in.
We can help you to put together a successful R&D relief claim.