The UK tax system is complicated but research and development (R&D) tax credits can be especially tricky to understand.
That’s partly because what counts as R&D, and what amounts to true innovation, is judged on a case-by-case basis against criteria that can seem almost abstract.
For example, to qualify as R&D for tax purposes, your project must contribute to a wider understanding in a particular field. It can’t just be a superficial change to existing technology.
Clearly, making this judgement requires expert scrutiny. There’s simply no way to run it as an automated box-ticking exercise.
At the same time, the validity of your claim depends on what else is going on in your sector.
Even a claim that is perfectly valid in its own right can be cancelled out if another company turns out to have done essentially the same work, reaching a similar solution.
Understanding what may or may not be in scope is perhaps best explained with case studies and examples, but first what exactly are R&D tax credits?
A quick guide to R&D tax credits
In their present form, R&D tax credits allow small companies to deduct an extra 130% of their qualifying costs from any profits, on top of the existing 100% of qualifying costs that can usually be deducted – a total potential deduction of 230%.
This relief was launched by the UK government in 2000 with the intention of boosting innovation.
The idea was to encourage businesses already working in this territory and, more importantly, to incentivise those not already actively pursuing innovation.
Successive governments have held this ambition because it’s in everybody’s interest to position Britain as an economy built on technology, engineering and design rather than on manufacturing industries, as in the past, or on services and retail, as seemed to be the previous direction of travel.
They wanted to see more firms like electrical appliance giant Dyson and Arm, the Cambridge-based company that makes computer chips used in electronic devices around the world.
Your claim for R&D tax credits is made as part of your annual corporation tax return. It then takes typically around 30 working days to process that claim.
In practice, it might take much longer if your business is large, if your claim is especially contentious, or if HMRC has had a high volume of R&D tax credit claims in a given year.
Fortunately, there is also an option to run your first claim past the Revenue in draft form to get an initial read-out of whether it’s a non-starter, potentially saving everyone a lot of time.
Could you claim R&D relief?
To claim R&D tax relief under the SME scheme your company should have a turnover of no more than €100 million or less than €86m on the balance sheet, and you’ll need less than 500 full-time staff. You don’t have to be in the technology or engineering sector to be an innovator.
As long as your company undertakes scientific or technological projects developing new products or processes, or substantially improving existing ones, it’s possible you might be eligible for R&D tax breaks.
Regardless of the sector you work in, there are some questions you can ask yourself that will give you a rough idea of whether your work might be eligible.
First, does your research intend to achieve a technological advance? To qualify for relief, it can’t just be about tinkering, cosmetic improvements or superficial innovations.
A new shape for an existing product is unlikely to count, even if that is ‘commercially innovative’, and your work can’t be about advances in economics, social sciences, arts or humanities.
Secondly, does it achieve an advance in overall scientific or technological knowledge? Unless people outside of your business learn from your work and build upon it, then it probably won’t qualify for R&D tax relief.
Thirdly, and arguably most importantly, does the project address an uncertainty that a knowledgeable professional in your field couldn’t quickly and easily work out for themselves?
In plain terms, reaching a solution has to be hard work or need painstaking research and you ought to go into it unsure of success – you should know what you want to achieve, but not whether it is scientifically possible or feasible.
If you answered ‘yes’ to the above, your project may be viable and your business could get a well-earned financial boost.
There are various other technicalities to bear in mind, however, and the best thing to do is sit down with one of our experts who can talk through the qualifying criteria in full.