The government is pushing UK companies to claim R&D tax relief as they have a commitment to spend 2.4% of national wealth on R&D by 2027. This does not mean that they will let any claim through.
Here are our top tips to maximise your R&D claims:
Understand your Industry
So many businesses lose out on valuable claims as they are not aware that what their business does could qualify for R&D. When everyone hears the word R&D, they stereotypically think of scientists in white lab coats carrying out ground breaking scientific research.
The guidelines that govern what qualifies for R&D tax relief are very general and do not provide specific industry examples. However, the basis for a claim needs to be that something innovative has been achieved by overcoming an uncertainty in the project.
Claim the right costs in the right periods
Understanding what expenditure you can and cannot claim for as well as which periods this expenditure can cover, will allow accurate information to be collated and help to speed up the process of making a claim.
The claim periods for R&D tax relief are based on your company’s financial year and not HMRC’s tax year. The reason for this is that expenses outside of your financial year are not eligible in that year’s claim.
So what costs qualify for R&D tax relief?
- Staff costs – including wages, overtime and cash bonuses, pension costs, employer NIC contributions
- Software – expenditure on computer software involved in R&D activities.
- Consumables – materials that are consumed or transformed in your R&D process, such as water, fuel and power.
- Externally provided workers
- Payments to the subjects of clinical trials
- Subcontracted R&D
In some cases, travel and subsistence costs that relate directly to the R&D activity can be included within staffing costs for R&D tax credit relief. It is important to make sure that this is reimbursed in the correct way in order to qualify.
For travel and subsistence expenses to be included, they must be paid for by the individual personally and then reclaimed from the employer via an expense claim. If the business pays for these costs directly, then they cannot be classed as reimbursed expenses, and more importantly, would not qualify for R&D tax credit relief.
For employees and directors undertaking R&D activities, employer’s pension contributions can be included in the R&D tax credit claim. This can be a valuable relief whilst also maximising the individuals pension pot for their future.
Subcontracted R&D costs
The costs you can claim differs between the RDEC scheme and the SME R&D tax credit scheme.
An SME claim can include 65% of payments made to unconnected parties. Whereas the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is an individual, a partnership (where all the partners are individuals) or a qualifying body.
This is an area where some companies miss out on claiming for R&D expenditure that their subcontractors have done due to them not separating out the work on their invoices. Make sure that this is highlighted as this work would qualify for 65% relief which is better than missing out completely.
Trading losses can be exchanged for cash. How does this work?
A loss from an R&D claim can be carried forward and set against future profits gaining the maximum tax relief at 19%.
However, you can surrender your loss for a 14.5% tax credit from HMRC. Although this is a lower rate of tax relief, it provides certainty of receiving a cash injection now that can be reinvested back into the company.
- Understand what your business is doing and if you would qualify
- Make sure your claim covers your accounting year end, not the tax year
- Maximise on staffing costs such as pension contributions and reimbursed expenses
- Ensure any invoices for subcontracted R&D are highlighted/separated so that any work on the R&D activity can be identified
We use Markel for our clients R&D claims as they have experts in the field who will help to ensure that your business is claiming the maximum tax relief they are able!