Do you want to be able to deduct from tax 230% of expenditure on a development project and even receive a cash payment if the business is loss making?
The UK Government has expressed its desire to make the UK the most attractive place to start and invest in innovative companies.
As a result, tax incentives for companies to innovate continue to improve. The Research and Development tax credit scheme is an incentive designed to encourage innovation and increased spending on R&D activities by companies operating in the United Kingdom (England, Wales, Scotland and Northern Ireland).
What Are R&D Tax Credits?
R&D Tax Credits enable companies that incur costs in developing new products, processes or services to receive tax reductions, repayments of tax already paid or even to receive cash payments for a loss-making enterprise.
R&D Tax Credits are a valuable source of extra cash in any business – cash that can be used to enhance research and development and boost company performance.
Which Businesses Benefit?
To benefit from R&D Tax Credits, the company must be capable of paying Corporation Tax. Typically, this means the business is a UK-registered limited company.
What Projects Count as R&D (the official definition)
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science – like economics – or a theoretical field – such as pure maths.
The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.
To get R&D relief you need to explain how a project:
- made an advance in science and technology
- had to overcome an uncertainty
- tried to overcome this uncertainty
- could not have been easily carried out by a professional in the field
Your project can be to research or develop a new process, product or service or to improve on an existing one.
> For guidance the UK tax authority has a more detailed explanation here <
The benefits?
The main scheme is the SME (Small and Medium Enterprises). The costs eligible for R&D include the relevant elements of staffing costs, materials used, consumed or destroyed in the R&D, software and subcontracted costs.
In simple terms, if the eligible costs are £100, then R&D tax credit will add a further £130 of notional costs. This £130 is used to reduce Corporation Tax (19%) by a further £130 * 19% = £24.70.
So, your R&D costs (£100) have gone through your profit and loss account to reduce profit (saving £19 in tax) and the UK government will then add a further benefit of £24.70 by way of a reduction in tax.
If your business is loss making for tax purposes, it is possible to convert that loss into cash, even if no Corporation Tax has been paid in the past. This is particularly helpful for early-stage businesses.
There is another scheme called RDEC for large companies (over 500 employees in the company or group) or if the company receives grants or other notifiable state aid. This scheme is less beneficial than the SME scheme.
Time Limitations
R&D tax credits work in arrears. If you have been carrying out R&D in recent years, you can make retrospective claims for the past two years. For example:
- If your year ended 31st Dec 2018 – you will have made a tax return and paid the tax due.
- For year ended 311st Dec 2019 – you are due to pay Corporation Tax on 30th Sept 2020
Right now, you can revisit these years BUT, for the year ending December 2018 you will lose the chance if do not act by 31st December 2020.
What should you do now?
If you are considering setting up a company in the UK and engaging in R&D, it is worth discussing with our local accountant and R&D tax specialist to ensure your systems and processes are able to capture all the relevant costs. This will take the pain out of the claims process.
We work with Stephen Perry & Co who have over 30 years experience in accountancy and tax planning in the UK to help our clients meet their obligations to the UK government and to pay less tax.
Conclusion
The UK tax regime supports R&D and the benefits can be significant.
Careful planning will optimise the benefits and allow you “to convert £100 into £230”
