Research and Development Tax Relief

• #Finance
• #Innovation

Do you want to keep your company on top of its game, and even develop new products with your name? Then boy, do we have the thing for you! 

Don’t worry, this won’t be an infomercial. But it will explain why and how your business can benefit from Research and Development tax relief and how it can make investing in R&D projects more cost-effective. So if you are thinking of innovating, but aren’t sure you have the capital for it, this post will show you how you can claim against corporation tax owed or paid to make innovation more affordable. 

What is R&D?

Research and Development is associated with many activities companies undertake to innovate and introduce new products and services.

Many companies apply a short term vision in their innovation projects and don’t understand that an upfront investment in a project with high risk can reward both the business and its finances. 

Companies that understand a longer-term vision for the development of their business also know that they can apply for R&D Tax Relief to mitigate against the financial risk that a new product development can carry. 

What is R&D Tax Relief?

Research and Development Tax Relief (or R&D relief) is a tax incentive designed to encourage UK companies to invest in research and development. In return for said investments, you can receive either a cash payment and/or Corporation Tax reduction. 

In short, if your company invests in high risk, trial-error based projects (a.k.a. innovation), the government will cut you some slack when it comes to taxes. 

Why is it important?

Well, for one, through R&D companies can design new products and improve their existing offerings. R&D will not give you direct profit (unless you later capitalise the development as an intangible asset), but it may lead to patents, copyrights and trademarks as discoveries are made, and this then generates profit. Overall, this will help your company stay ahead of the market (as well as your competitors). 

On a more general spectrum, investing in research and innovation helps the country (i.e. those living in it, i.e. you) by strengthening industries, creating jobs, enriching cultural wellbeing and by increasing GDP, which results in a better quality of living. That’s why the British Government (and many others) offer the incentive.

“The UK Government has put research and innovation at the heart of its Industrial Strategy, setting an ambition for the UK to become the most innovative country in the world and increase its total R&D expenditure to 2.4% of GDP by 2027.”

Am I eligible?

Find out in less than one minute.

The R&D qualification criteria are intentionally broad. This means that no matter your company size or the sector you’re in, if you’re taking a risk by investing in something that could advance innovation, you will most likely qualify.  

There is also no minimum amount of expenditure needed in order to claim an R&D Tax claim. You do, however, need to check certain criteria.

But… my accountant says I don’t qualify for R&D tax relief

We have found that many of the misconceptions about R&D come from the advice received from accountants. It seems there is a lack of knowledge about how to produce a report and if your company’s activities actually qualify. 

How can I apply?

In theory, it’s easy: tell HMRC what project you’ve undertaken, and how much you want to claim back.

In practice, it’s a little more complicated. 

Let’s start at the beginning.

The technical report: What projects qualify?

Well, good thing you asked. The definition for what qualifies as research and development in this case is not the same as the one you see in dictionaries. It’s not just about finding ways to improve or develop a product – in fact, it’s also about finding out the ways in which a product or process can be made better, or more efficient ways to make an existing product, etc.

The need for research and development within a company begins when there is a problem and when the answer (whether it’s scientifically possible/technologically feasible/ how to achieve it in practice) is not readily available. For the purpose of R&D applications, this is called “uncertainty.”

For example, say you own a company that creates video content. 

Uncertainty: you would like a software that helps you edit video within your phone or tablet

❌ Not an R&D qualification: finding ways to edit content (there is no innovation in this as a competent professional could carry out the process) 

Now, say you’re that same company.

Uncertainty: you’d like your software to create custom as many custom videos as possible by uploading a few assets

✅ R&D qualification: you fund research that will create a machine-learning software that will automatically generate unlimited bespoke videos 

When it comes to applying, most people find this bit (the figuring out of what innovation you’ve funded) the most challenging.  Remember that, in the simplest of terms, it’s about the process, not the result.

So rather than concentrating on what product was developed, focus on the scientific or technological advances that were needed to develop it. It’s not enough to say that investing in this field has guaranteed commercial innovation – the ultimate aim of R&D is industrial strategy.

The Financial report: how much should I claim?

To calculate your enhanced expenditure you need to:

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.

R&D: development of unique software to create video

• Taxable profit before R&D tax relief = £250,000
• Estimated corporation tax liability before R&D tax relief = 19% x £250,000 = £47,500
• Qualifying R&D expenditure = £100,000 (£50,000 staff salaries, NICs etc.; £50,000 consumables)
• Enhanced R&D expenditure = £100,000 + 130% = £230,000
• Adjusted taxable profit = £250,000-£230,000 = £20,000
• Estimated remaining corporation tax liability = 19% x £20,000 = £3,800
• Tax saving = £47,500-£3,800 = £43,700

Purr’s own experience

You can do the report in-house or commission a specialist firm to help you generate a report of the best quality. We do not provide any R&D support, but we do recommend specialist teams that we regularly work with and have helped support our R&D investment. Get in touch with Frank Collings at Queens Lane Consultants or call QLC on 020 8062 6837 to find out more.

Our philosophy is to:

Be proactive and take upfront action rather than reactive steps at the end of a project or end of the financial year.

Involve people from different teams and unify your team to produce the best report possible.

Get rewarded for innovation to give you the competitive edge in your market and keep your company relevant.

Take advantage of this opportunity that will definitely make your company’s growth resonate