Things You Need to Know About Making an R&D Tax Claim
R&D Tax Credits are designed to reward companies for investing in innovation, specifically to advance science and technology. It can be a complex tax relief to claim for and many businesses aren’t even aware they are eligible.
A recent report in The Telegraph says businesses across the UK are losing out on billions by not claiming for R&D Tax credits.
If you are carrying out any research and development (R&D) in your business, you should be making the most of the government scheme to claim tax relief on eligible R&D spend.
In this article I’ll be highlighting the things you need to know before putting together a claim. First let’s take a look at exactly what R&D Tax credits are and what type of business can make use of the scheme.
R&D Tax Credits in a nutshell
‘R&D Tax Credits’ is the umbrella term for tax relief available to businesses that invest in developing products, services, software or processes. The key is that the R&D activities seek to achieve an advance in technology. This can be creating new products, services or processes or modifying existing ones.
Who can claim R&D Tax Relief?
Any business that meets the eligibility criteria can claim, regardless of sector. It is a common misconception that only businesses in the technology and engineering sectors can claim. This isn’t true. Eligibility criteria simply asks that:
- Your business is a Limited Company and is subject to Corporation Tax
- Your business has carried out qualifying research and development activities
- Your business has actually spent money on these projects
For the main scheme, your business also needs to be a small or medium-sized enterprise (have fewer than 500 employees), and either, a turnover of less than €100 million, or gross assets of less than €86 million. If your company has more than 500 employees, or is in partnership with another company, other rules apply under the Large Company Scheme.
The information you’ll need when making an R&D tax claim
Putting the right information together when you submit your claim to HMRC for R&D Tax Relief could make all the difference and ensure you maximise your tax break.
Part of the process of making a claim involves writing what is called a ‘technical narrative’. This part is really important and often the bit that companies fall down on. The technical narrative explains your project, including the features and challenges involved.
HMRC will want to see that you have looked for an advance in science or technology and sought to achieve this aim. You will need to show that your challenge could not easily be worked out by a professional in the field and that you had to overcome scientific or technological uncertainty.
The narrative needs to be written from a technical perspective, not a project management one. It needs to be technically complex and show how resource intensive your activities were. Ideally your R&D technical narrative should be 2-5 pages long.
Details of your R&D spend
This is essentially all of the financial information related to your R&D project. You will need to know what costs can be included in your R&D Tax claim as not all costs are eligible. Costs that can be claimed are known as ‘qualifying expenditures.’ You should be able to claim for:
- Direct staff costs
- Subcontractor costs
- Externally provided worker costs
- Software costs
- Utility costs
- Payments to clinical trial participants
- Contributions to independent research
There are a lot of costs you can’t claim for, even though they may have been incurred as a direct result of your R&D project.
Items you can’t claim for include travel and subsistence, recruitment agency fees, postage, stationery and freight, computer costs, capital expenditure, rent and business rates, telephone and broadband charges, server costs, professional fees and Patent attorney fees. Ideally, consult with your accountant or an R&D tax specialist to clarify the costs you can claim for.
You will need to match finances to the data in the technical narrative. If you don’t do this HMRC will almost certainly query your claim.
Information about employees that have worked on the projects
Qualifying staff costs fall into two categories (direct and indirect). Let’s take a brief look at what this means. Direct staff expenditure refers to the costs of directly employed staff who are engaged in carrying out R&D activities.
This includes gross wages, Employer’s National Insurance Contributions and pension costs. The staff have to be company employees under a contract of employment. Directors wages can also be included if they are working on the R&D project.
As employees are unlikely to be spending all of their time on R&D, you will need to maintain timesheets or similar records to present with your claim to HMRC.
Indirect staff costs are those where employees are engaged in wholly or partly supporting those engaged directly in R&D activities. This includes clerical support and administration staff, maintenance engineers, security staff and training staff.
How long will it take for HMRC to approve?
Typically, once you’ve submitted an R&D Tax claim to HMRC, it takes around 6-8 weeks to get approved, or longer if the tax office has queries. Once approved you’ll receive either a tax rebate or a Corporation Tax deduction.
Don’t delay, start your claim today. Speak to an R&D tax specialist to find out if your project is eligible.