COVID-19: Research and Development tax relief

Thursday, 26 March 2020

With the current pandemic impacting on cash flows, this is a timely reminder to all businesses that a tax relief exists that could really help you in these challenging times. It rewards innovation and has the potential to provide a valuable source of revenue to help maintain and shape your business.

Research and Development (R&D) tax credit is a government incentive designed to reward UK companies for investing in innovation. In order to qualify, a company must be subject to UK corporation tax and involved in R&D and incurring costs on these projects.

By way of a of a background, in the last tax year, 21,865 small and medium-sized enterprises (SMEs) made a claim for R&D tax relief, and the average amount of tax relief obtained was over £60,000. To clarify for R&D purposes, an SME is a company which has fewer than 500 staff, less than €100 million turnover and less than €86 million in gross assets. (Larger companies who exceed the above limits can still claim R&D relief but at a reduced rate).

Whilst based on our experience the number of businesses claiming R&D relief is on the up, there’s still work to be done in spreading awareness of this valuable relief; now more so than ever.

The scope for identifying R&D is huge – in fact it exists in every single sector and you should know that, even if your project was last year, a company has two years from the end of its accounting period to submit a claim for qualifying spend identified during that period. Therefore, returns already submitted without an R&D claim can be amended.

Has this sparked your interest? Read on…

What is R&D?

One of the biggest misconceptions is that R&D tax incentives are only for those who carry out scientific research in a laboratory.

HMRC’s definition of R&D doesn’t really help: to quote, ‘Research and development … takes place when a project seeks to achieve an advance in science or technology … through the resolution of scientific or technological uncertainty.’

Understandably, confusion exists because it’s not always easy to relate real projects to the terminology.

What the definition really means is that, if a business isn’t sure whether a project is scientifically or technologically possible, or they don’t know how to achieve it in practice, it could be carrying out R&D. It’s clear that R&D can be found widely in various everyday activities dealing with manufacturing, engineering, software development, as well as the more commonly thought of areas such as the pharmaceutical and scientific sectors.

The definition is deliberately broad so that it can be applied to any industry, not just laboratory-based ones and, as an added bonus, the R&D project doesn’t need to have been successful to qualify for enhanced relief.

Why is the relief so beneficial?

Now for the interesting bit … for every £100 spent on R&D, the deduction from the company’s taxable profit is £230! (Yes, you read this correctly).

And if your company has made a loss for the year, then the full R&D credit of £230 can be surrendered for a repayment at a rate of 14.5%, ie. cash in the bank of £33.35 for every £100 spent.

Furthermore, these rules remained unchanged in the recent Budget!  

What costs qualify for relief?

Broadly, as long as a cost has a link to the R&D project being undertaken, then it will be a qualify for the purposes of the tax relief.

This includes:

• Staffing costs, including wages and salaries, employers’ National Insurance and employer pension contributions
• Consumable materials used up in the R&D process
• Utilities, including water, fuel and power
• Externally provided workers and subcontractor costs (claimable at 65%)
• Software costs

To qualify, a company must not have received any state aid towards the costs of the R&D project, if so this is likely to compromise any R&D claim. If you receive a grant to fund a project, you can still obtain tax relief, just at the reduced large company rate.

Conclusion

As a form of innovation funding R&D tax credits can be transformative. At MHA Larking Gowen we are focused on helping innovative companies realise the full potential of these valuable tax incentives.

Now more than ever there is a need to work together to ensure optimum benefit and our specialist tax team with its experience of both appraising R&D projects and submitting successful claims to HMRC is here to help you.

To find out more, email [email protected]

Sarra Mattin