Research and development (R&D) tax credits allow companies that undertake qualifying R&D to claim enhanced tax deductions on qualifying R&D costs.
For small and medium sized enterprises (SME’s), this means they can claim 225% of the value of qualifying costs as tax deductible expenditure so reducing the taxable profits in the year. So for every £1,000 spent on R&D then they can actually claim £2,250 as a tax deductible expense in the period. Loss making companies can surrender the deduction for a payable tax credit of 14.5%; so getting cash repaid to the business now rather than carrying the losses forward to offset against future profits.
For non SMEs the reliefs are reduced, so they can only claim 130% of qualifying expenditure and get just a 10% payable credit if loss making.
In order to claim these benefits you need to ensure that the R&D that is being undertaken falls within the HMRC guidelines which for tax purposes means that R&D only takes place when a project seeks to achieve an advance in science or technology. This will be characterised by an appreciable element of innovation and creativity. HMRC will not allow relief to be claimed where the project merely aims to recreate work already performed by others. Therefore only those activities which contribute to this advance through the resolution of scientific or technological uncertainty are deemed to be true research and development and so able to claim these tax advantages.
That said, R&D claims aren’t all about white coats and test tubes, we have seen claims ranging from the development of online financial trading platforms and software to improving the taste of cherries!
To claim these allowances the “claim” just needs to be included on the company’s annual Corporation Tax return. HMRC do not require you to provide any further information on the claim however we would always advise that a supporting report is prepared which highlights what the expenditure was and how it meets the criteria for R&D stipulated. HMRC do undertake checks on R&D claims and so being able to provide this information initially often ensures the claim is approved quicker and any tax refunds which are due to the company are paid quickly.