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Research & Development Tax Credits
Many companies are claiming R&D tax benefits successfully, but many others either do not realise that they have eligible projects, worry that the claim process is too onerous and costly or, most commonly, ‘bundle’ the R&D claim as part of their broader tax and accounting affairs without a rigorous effort to optimise its scope.
The financial benefits of the scheme can be substantial, though, and for companies involved in technology projects, the scope of their eligibility for R&D tax incentives warrants special attention.
What are research and development tax credits?
For those who may not have heard of R&D tax credits before, it is a tax relief scheme, which gives you money back for development work you’ve already done. They are based on how much you spend on new development, and (until 2012) how much you’ve paid in tax for your whole company.
It’s a government incentive for companies developing new technology, and an incentive that governments know works, so it keeps getting better with each year.It can apply to companies that are loss making and profit making, and you can claim back as cash the tax you’ve overpaid in the previous two years. It works by increasing the value of your development spend by a multiplying percentage (eg. 225%), and therefore reducing declared profit (and the tax on that profit).
How much is the tax relief worth?
It varies, depending on how much you have spent and on what, how profitable you’ve been, and the year in which you did the work. It can be worth between 8.4p and 30p per pound spent on development, and that can take the form of cash (for smaller companies) or a reduction in future tax bills (larger companies). The majority of the qualifying spend is usually labour costs, but there are many other types of spend that can be included, both those spent directly on your development, and parts of indirect costs too.
How do you claim the tax relief?
Claims are submitted to Her Majesty’s Revenue and Customs (HMRC)’s regional specialist R&D tax units. You will need to have the correct calculations to substantiate the claim, and also to prove that the work is classified by HMRC as R&D. You need to claim within HMRC time limits (two years from your end of year) and ensure that all eligible costs have been entered to the claim, or you’ll be missing some of the benefit.
HMRC has a website and a dedicated fifteen part manual to help companies complete their claims, or you can use an R&D and tax specialist like McLintocks.
Whether yours is a manufacturing, engineering, hi-tech or any other technology-based company, it is highly likely that you will have eligible work.
Listed below are a few pointers and links to indicate if you could benefit more.
Please do have a review and contact your usual McLintocks partner for more information and we can look to progress your claim.
1 What is the scientific or technological advance?
Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.
Science does not include work in the arts, humanities and social sciences (including economics).
It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
2 What were the scientific or technological uncertainties involved in the project?
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.
You should set out at a high level, in a form understandable to the non-expert, what these uncertainties were and when they started and ended.
3 How and when were the uncertainties actually overcome?
Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.
4 Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case a valid technological uncertainty can still exist.
Alternatively, if the project is one where there is little public information available, you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate set out the details and have evidence available if needed.
Conditions to be satisfied
DTI (as was) Guidelines
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