R&D tax credits are a government-designed incentive to encourage businesses to invest in research and development.
The amount of tax credit a business is entitled to depends on whether it accesses the SME scheme or the large company scheme (RDEC).
In this blog, Anne Rose, Head of Tax at Burgis & Bullock, discusses what an R&D tax credit is, who can claim, what expenditure qualifies and how to calculate the tax credit your business is entitled to.
What is R&D tax relief?
R&D tax credits reward innovative behaviour and companies that seek to develop new technologies, products and process. This in some cases will include improvements to existing technologies.
Businesses use R&D tax relief as a means of getting cash back into a business and to provide continued support to research and product development.
Find out more about R&D tax relief, how to claim and who is eligible by reading our recent blog on the subject: How to claim R&D tax credits for your growing startup today
Calculating your qualifying expenditure for R&D tax credit
The first stage of any R&D tax credit claim is to identify which projects meet HMRC’s definition of qualifying expenditure, and importantly, how much of the work done in the accounting period of claim will qualify.
Here’s a reminder of the qualifying criteria you must hit:
- Must be performing qualifying research and development activities
- Qualifying research is defined as an activity that has a potential to contribute to industry-wide technological or scientific knowledge
- This includes any process involving experimentation, exploration, creation or invention where there is no certainty whether any results will be achieved
The R&D tax relief will be calculated for an accounting period. Take some time to identify which projects qualified within that period and then delve into the individual projects for the qualifying costs.
This will broadly be the costs of employing people who have worked directly on the R&D project – that includes the employers National Insurance and pension contributions, in addition to salary and bonuses.
By the end of this process you will know who has been working on the project, how much time they have spent doing so and what portion of their total salary costs will be covered under qualifying expenditure.
In certain limited circumstances, you can also include the relevant costs of people involved in indirect activities associated with the R&D – this for example could be people employed to collate results and write-up reports.
After analysing the people side of the equation, assess the consumables that have been used during the course of the R&D work. That could be materials, loose tools or any other consumable items – for example prototypes and testing equipment.
Finally, review subcontractor costs and software costs. A common example for subcontracting would be a subcontractor to manage testing of a product, and for software a business may require a unique programme to overcome a hurdle in the design process.
Now you have your figure for qualifying expenditure, you can see which scheme you are entitled to and the associated tax relief with that scheme.
