Although the term research and development (R&D) conjures up images of scientists in laboratories conducting super-scientific experiments, R&D tax relief has a much wider scope than the name suggests.
The relief allows small companies that take part in R&D projects to deduct an extra 130% of qualifying costs (on top of the usual 100%) from their profits. This means that for every £100 of qualifying R&D costs, you can deduct £230 from your company profits.
To qualify for the relief, the project must make an advance in science or technology and help resolve scientific or technological uncertainties.
This wording is a little ambiguous and it’s easy to think your R&D doesn’t meet the conditions if you don’t work in science or tech.
However, you don’t need to wear a lab coat to successfully claim R&D tax credits.
Your project could lead to a new process, product, service or improve an existing one. For example, Grasshopper Ltd designs, builds and hosts websites. The team worked on a developing their system for managing content which led to a successful R&D claim.
On top on the broad definition of R&D, you may be able to make a claim if your company makes a loss, your project fails or you work overseas.
You can get a tax credit (in the form of cash) if your company makes a loss during the time of the R&D claim.
The calculation is a little complicated as it is worth 14.5% of the lesser of the trading loss or 230% of the qualifying R&D costs.
For example, Grasshopper Ltd makes a trading loss of £100,000 and has qualifying R&D expenditure of £30,000. We need to find out which figure is lower to work out the tax credit.
£30,000 x 230% = £69,000. As this is lower than the trading loss of £100,000, the figure of £69,000 is used. The tax credit is calculated as £69,000 x 14.5%, giving Grasshopper Ltd a tax credit of £10,005.
Unsuccessful projects can still qualify for R&D tax relief, so don’t give up on your claim if your project has failed or been abandoned.
As long as you can prove the project meets the government definition of R&D, your claim will be successful, even if the work was not.
You’ll need to fill in the paperwork in the same way as a successful project, explaining what you were trying to achieve and your methods.
Your project doesn’t have to take place in the UK to qualify for relief.
For example, Grasshopper Ltd pays a business in Germany to make a prototype for its project. The cost associated with this activity may qualify for tax relief.
Things get more complicated when using subcontractors, but one thing to keep in mind is that subcontracting costs relief can vary depending on whether the contractor and subcontractor are connected companies.
Talk to us
We can advise on whether you company and project meets to criteria for R&D relief and support you through making a claim. Get in touch to discuss your circumstances.