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What are the criteria for R&D eligibility?

The two criteria in determining whether an innovative company is eligible for R&D tax relief

are advancement and uncertainty.

What expenditure qualifies?

If your company and project both meet the necessary criteria, then it is possible to claim R&D tax relief on revenue expenditure, and in some cases capitalised revenue expenditure across three main areas; staff costs (gross salary, employers NIC, pension contributions etc.), subcontractors/freelancers, and consumable items (i.e. heat, light & power, materials and equipment used and/or transformed by the R&D process).

Are we eligible for the incentive?

Many business owners and finance departments will wonder if they are eligible for R&D tax credits. The answer is often yes. If your company is taking a risk by innovating, improving or developing a process, product or service, then it can qualify for an Research & Development tax relief claim. It’s rare to find a business where all innovative activity is transparent and neatly housed within easily identifiable job roles and functions. We tend to find it’s more typical that R&D functions are spread across numerous aspects of the organisation, with some individuals playing a far more active role.

We often start by working with clients to identify the specific job roles within a business and attributing a percentage of their time as qualifying Research & Development expenditure. As a result, it’s not uncommon for us to find a web developer, systems engineer, technical director, product designer or CEO that is more involved in day-to-day innovative activity than even a dedicated R&D Manager might be.

How is it calculated?

For SMEs, from 1 April 2012, the R&D tax relief claim enhancement (the enhanced deduction) was increased to 225% of the qualifying expenditure for R&D tax credits incurred. Therefore, where an SME incurs expenditure of £100,000 on qualifying R&D, it can deduct £225,000 when calculating its taxable profit, (or loss) for corporation tax purposes. As the £100,000 would already be accounted for in its accounts, the balance of £125,000 would be an additional deduction from its taxable profit, and the corporation tax saving would be £25,000 (at a corporation tax rate of 20%) – the equivalent of the company receiving 25p from HMRC for every £1 they spent on R&D activities.

From 1 April 2015, the enhanced deduction was increased further to 230% of the qualifying R&D expenditure incurred. Using the same example as above, the additional deduction is therefore increased to £130,000, and the corporation tax saving is also increased to £26,000 (at a corporation tax rate of 20%).

Can I claim even if we are unprofitable?

A common misconception about tax credits is the idea that you must be profitable for them to be worthwhile, and this has been false for many years now. The SME scheme used to be much more favourable to loss-making SMEs than profitable ones (25% vs. 15% return). However, over the last couple of years the schemes have become more equal, and now both profitable and unprofitable companies can get up to 25% return. Furthermore if you have grant funding you can still make a claim, this is also misunderstood by many SMEs that have taken external funding in the form of grants, but they too can claim back on innovative processes in the form of a research and development tax claim.

Find out if you're eligible today