Did you know you can reclaim up to 33.35% of your costs for innovative projects and you can go back 2 years?
What is the R&D incentive and how does the tax benefit work?
The UK Government want to encourage investment in innovation and reduce the cost of corporate and applied R&D. To enable this and inspired by Canada, the Government introduced the R&D tax incentive which allows companies subject to UK corporation tax to reclaim up to 33.35% of their Research & Development costs by enhancing or uplifting eligible R&D costs by 130%. We will discuss eligible R&D cost categories later, however, this mechanism of enhancing costs by 130% will result in either a reduction in taxable profit, triggering a refund in corporation tax, or additional losses which can be surrendered for a cash credit.
The R&D tax incentive claim is made in a Company Tax Return (CT600) which is typically due to HM Revenue & Customs (HMRC) 12 months after the company year-end, of which the amendment period is a further 12 months. Therefore, it is permissible to review and make a claim for the previous two accounting periods (assuming a 12-month accounting period).
Example: Company A has an accounting period of 31 December, as it is currently July 2019, Company A can retrospectively claim for the accounting periods ended 31 December 2017 and 31 December 2018.
To qualify for the R&D incentive, the company would be required to conduct activity which seeks to achieve an advance in science or technology through resolving a scientific or technological uncertainty. An advance could be, and is not limited to, the creation of a new product or the appreciable improvement of an existing product or device. It could also be to simply improve the overall knowledge or capability within that field of science or technology such as in Information Technology or Engineering or any subdiscipline thereof (Civil or Mechanical). There is no requirement for success as is not outcome or result focused, HMRC’s primary interest is in the company’s R&D ‘journey’ which is the systematic, investigative or experimental process for resolving technological challenges and its improvement to knowledge in comparison to what is available in the public domain.
Once R&D projects have been determined, the next step would be to quantify the cost for conducting R&D activities. HMRC has provided the following cost categories; Staffing costs, Subcontracted R&D, Consumables, Software, Externally Provided Workers and Contributions toward independent research. There are differences between the Small-Medium Enterprise (SME) scheme and the Large company scheme, for example, the exclusion of Subcontracted R&D to limited corporations. HMRC appreciate there is a commercial rationale to every project and thus all analysed costs would need to be apportioned to represent the R&D element of the project and exclude any commercial or routine activities. There are several other considerations in ensuring only eligible costs are included in claims, HMRC frequently query claims which include ineligible costs.
How you can start claiming now
The first step would be to determine your company’s claim periods by using the example above and to record all projects where you could consider to be meeting the R&D criteria. (Contact us for a free project list template). Review and document where the project sought to achieve an advance in science or technology, and where you encountered technological uncertainty including how you/the company sought to resolve such challenges. This data gathering process will determine your R&D projects and will serve as supporting technical documentation for the claim.
The second step would be to quantify the R&D efforts by analysing the costs against the eligible cost categories as listed above, for example, in assessing staffing costs, to record which personnel contributed toward the R&D projects and over which period, apportioning the costs where necessary.
The final step would be to submit the supporting technical documentation to HMRC and incorporate the R&D claim in the CT600s.
This guide was written by Joseph Ismail, Consultant. GTIC has helped several construction and engineering companies with their R&D claims and can provide free project templates, quality assurance reviews and other assistance to ensure you always optimise your R&D claims.
Call now to find out more