R&D Tax Credits have been part of the tax legislation for more than 20 years. They have gone through various changes over that period of time and that has never been more true than right now.
Research and Development Tax Relief is a government backed scheme that reduces an SME company’s tax liability if it is profitable or offers a repayable Tax Credit if it’s not. It is designed to support companies working on innovative projects in the science and technology sectors, regardless of whether or not they succeeded.
If you are a large company or an SME being subcontracted to by a large or international company then you can only claim under RDEC. This has become a particular issue recently as interpretations of subcontracted R&D have changed. This means that if you enter into a contract with a customer, whether that be verbal or written, where they will purchase the end product of your R&D efforts that you will be a subcontractor. You can only claim for subcontracted R&D under the less rewarding RDEC scheme.
Just how innovative does my project have to be?
In order to qualify for R&D tax relief, your business (and possibly your Subcontractor) will need to be able to demonstrate that the advance your project was trying to achieve within a specific field of science and technology was significant, and couldn’t easily be achieved by another competent professional within the industry.
You would also need to demonstrate that the advance could not be achieved through the use of existing knowledge or routine adaptions to that existing knowledge, by the competent professional. It is only at this point that, if you have a project that is seeking an advance, R&D begins.
If you don’t have a competent professional within your organisation who is a specialist in the field of science or technology for the project that you are trying to complete, it can be very difficult to justify a claim. So if you are working with a subcontractor it is vitally important that they play an active role in supporting your R&D claim. HMRC are generally looking unfavourably on claims submitted by companies without an inhouse competent professional.
If I am eligible, what costs can I include in my claim?
Consumable Material costs – if you are developing a prototype you will often have to use materials to develop it. If you can’t reuse these materials after they have been incorporated into the prototype and you don’t sell the prototype, then the materials will have been consumed and can be included in the claim.
Third Party costs – payments to subcontractors for Research/Development activity,
Externally Provided Worker costs – going to an agency to bring in specialist help on a “short to medium term” basis, or payments to a University or Research Centre for support on a project.
Staff costs – wages & salaries, bonuses, pension contributions and Employers NI contributions, together with staff travel costs where the travel has been for relevant R&D purposes.
Software costs – If you have to use specialist software in your research or you are using project management software to manage the R&D team, then you can include a portion of the software costs.
Utility costs – You can include a proportion of light, heat and water in the R&D claim, provided that some of the R&D has been performed in-house.
There have also been some other significant changes of late. The value of the SME scheme has been significantly reduced and from 1 April 2023, a profitable SME company will benefit to the tune of 22% of their eligible costs and loss making SME will benefit to the tune of 18.8% of their costs when this was previously 33.35%. An RDEC claim will generate a cash benefit in the region of 15% of a company’s R&D costs.
There are further changes but we’ll cover those in the next article.
In the meantime, if this article has prompted any questions you can call Simon Bulteel, at Cooden – R&D Tax Specialists on 01424 225345 or book a discovery session at calendly.com/cooden/discovery-eaib