R&D Tax Relief for small and medium companies

R&D Tax Relief for small and medium companies

Research and Development (R&D) relief is aimed at helping companies that work on innovative projects in science and technology. SME R&D relief allows companies to either:

Enhanced expenditure

Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction

 Without reliefWith relief
Non-R&D expenditure(1,000)(1,000)
R&D expenditure(100)(100)
R&D enhanced expenditure0(130)
Taxable profit900770
Tax @ 19%171146

Tax credit

Or, claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

 Without reliefWith relief
Non-R&D expenditure(3,000)(3,000)
R&D expenditure(100)(100)
R&D enhanced expenditure0(130)
Taxable loss(1,100)(1,230)
Surrenderable loss: lower of  
Trading loss (1,100)
230% of R&D expenditure (230)
Tax credit (14.5% of £230) 33
Tax loss carried forward(1,100)(870)

Note that there is also a limit on the size of the payable tax credit companies can receive – companies applying to the SME scheme can only claim a tax credit of up to 300% of their combined PAYE and NIC liability, plus a £20,000 grace amount.

Projects that count as R&D

The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. The project must relate to your company’s trade. To get R&D relief you need to explain how a project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

Each of these are explained in more detail below

  • Advances in the field: Your project must aim to create an advance in the overall field, not just for your business. This means an advance cannot just be an existing technology that has been used for the first time in your sector.
  • Show that a professional in the field could not work this out: You should explain why a professional could not easily work out your advance. You can do this by showing that other attempts to find a solution had failed. You can also show that the people working on your project are professionals in that field and get them to explain the uncertainties involved.
  • Show there was uncertainty: A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done, even after referring to all available evidence. This means that your company or experts in the field cannot already know about the advance or the way you achieved it.
  • Explain how you tried to overcome the uncertainty: You should show that the R&D needed research, testing and analysis to develop it. You need to be able to explain the work you did to overcome the uncertainty. This can be a simple description of the successes and failures you had during the project.

Companies that qualify as small or medium

You can claim SME R&D relief if you have both of the following:

  • less than 500 staff
  • a turnover of under 100 million euros or a balance sheet total under 86 million euros

Costs you can claim

You can claim certain costs on the project from the date you start working on it until you develop or discover the advance, or the project is stopped.

  • Employee costs: For staff working directly on the R&D project, you can claim a proportion of their: salaries, wages, Class 1 National Insurance contributions and pension fund contributions. You can claim for administrative or support staff who work to directly support a project. For example, human resources used to recruit a specific person to work on the project. You cannot claim for clerical or maintenance work that would have been done anyway, like managing payroll. You can claim 65% of the relevant payments made to an external agency if they provide staff for the project. From April 2023, employee costs for workers on a UK payroll will be permitted.
  • Subcontractor costs: You can claim 65% of the relevant costs of using a subcontractor for your R&D activities. From April 2023, only subcontracted work performed in the UK will be eligible for the relief.
  • Software: You can claim for software licence fees bought for R&D and a reasonable share of the costs for software partly used in your R&D activities.
  • Consumable items: You can claim for the relevant proportion of consumable items used up in the R&D. This includes materials & utilities.
  • Clinical trials volunteers: For R&D projects in the pharmaceutical industry, you can claim for payments made to volunteers involved in clinical tests.

Costs that cannot be claimed

You cannot claim for:

  • the production and distribution of goods and services
  • capital expenditure
  • the cost of land
  • the cost of patents and trademarks
  • rent or rates

Calculate your enhanced expenditure

  1. Work out the costs that were directly attributable to R&D.
  2. Reduce any subcontractor or external staff provider payments to 65% of the original cost.
  3. Add all costs together.
  4. Multiply the figure by 130% to get the additional deduction to put into your tax computations.
  5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.

If you make a trading loss, you can choose to surrender this and claim a tax credit.

When the R&D activity starts and ends

The R&D activity starts when you begin working to resolve the uncertainty. You’ll need to identify the technical issues that need to be resolved, and make sure there is not an existing solution that has already been worked out.

The R&D activity ends when you solve the uncertainty or stop working on it. The activity you claim R&D relief for should end once you have a working prototype that solves the problem, and before you go into production.

Your R&D may restart if you find another scientific or technological uncertainty after you’ve started producing the product. If this happens, you can claim for further R&D while you try to resolve it.

How to claim R&D relief

You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to. You can claim the relief by treating it as a deduction from the company’s profits for the accounting period. Your claim must be made in the company tax return or an amendment to the return.

You must send:

  • a full company tax return with a completed tax computation
  • form CT600L, if you are claiming a payable tax credit or Research and Development Expenditure Credit

You can send more information to HMRC online to support your claim. For more information, read the ‘How to support your claim’ section.

How to support your claim

You may use the online service to send HMRC details to support your R&D tax relief claim.

You’ll need to have already submitted your company tax return  and completed tax computation and, if you are claiming payable tax credit, form CT600L to make your claim before using this service to send details to support the claim.

To use the online service, you need a Government Gateway user ID and password. If you do not have a user ID, you can create one when you first use the service.

If your claim covers a period of 12 months or more, submit a separate claim for each accounting period.

Details you’ll need to support your claim

It will help your claim if you give us a short summary that explains how your project:

  • looked for an advance in science or technology and aimed to achieve this advance
  • had to overcome scientific or technological uncertainty and how you did this
  • could not easily be worked out by a professional in the field

You’ll also need:

  • the start and end dates of the accounting period relating to the R&D activity — these should be the same dates as the period covered by your CT600 return
  • your 10 digit company unique tax reference (UTR) number
  • the total amount of tax relief you’re claiming
  • a breakdown of your qualifying R&D costs
  • your unrelieved trading loss for the claim period

Advanced Assurance

Advance Assurance is used to give companies a guarantee that any R&D claims will be accepted if they are:

  • in line with what was discussed and agreed
  • claimed within the first 3 accounting periods

If your company is applying for R&D relief for SMEs for the first time, it could qualify for Advance Assurance. (Your company does not need Advance Assurance before it applies for R&D tax relief.)

Who can apply for Advance Assurance

You can apply for Advance Assurance if you are:

  • a SME
  • planning to do R&D or already have done
  • part of a group and none of the companies linked to you have made a claim before

You can’t apply if you are:

  • entered into a Disclosable Tax Avoidance Scheme (DOTAS)
  • a corporate serious defaulter

You can apply for Advance Assurance yourself or your agent can do it for you.

Information you need to apply

To apply for Advance Assurance you’ll need:

  • your company accounts
  • your company registration documents (from Companies House)
  • HM Revenue and Customs (HMRC) correspondence
  • previous company tax returns (not needed for new companies)
  • the name of a contact with a direct knowledge of your R&D to discuss the application with HMRC

You’ll need to give some basic information about your company and detailed information about your company’s R&D activities.

Apply for Advance Assurance

If your company qualifies for Advance Assurance and can apply using the advance assurance form.

After you apply

Once HMRC have received your application they will contact you to talk about your R&D in more detail. This is normally a short phone call, but it may involve a longer discussion or a visit to your company if the case is more complex.

HMRC then send you a letter telling you if your application for Advance Assurance was successful or not. If you’re successful, the letter will explain your company’s responsibilities and what happens if your R&D activities change.

HMRC may contact you after you’ve submitted your first claim for R&D relief to check it matches the details in your Advance Assurance application.

Concluding comments

R&D credits is considered a high-risk area by HMRC as it has been abused by many companies in the past. Consequently, the rules are in a state of flux and changes are scheduled. This note reflects the situation at the date of publishing.

R&D Tax Relief for small and medium companies Research and Development (R&D) relief is aimed at helping companies that work on innovative projects in science and technology. SME R&D relief allows companies to either: Enhanced expenditure Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make […]

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