A new report by technology group the Coalition for a Digital Economy (Coadec) highlights that around three quarters of British start-ups struggle to understand how to apply for Research & Development (R&D) tax credits.
From our own experience of working with start-ups and SMEs, we’ve found that many businesses are bamboozled at the very beginning of the process. They find it difficult to understand if they are eligible to make a claim and don’t know where to start. With this in mind, we thought it was worth simplifying the eligibility criteria for claiming valuable R&D tax credits.
Does company size and turnover affect R&D tax credit claims?
There are two types of R&D tax relief schemes. These include:
- SME scheme – this is for companies employing less than 500 staff, turnover under £100 million or a balance sheet totalling less than €86million in gross assets. Currently, under this scheme, companies can claim 230% of their qualifying R&D spend.
- Research & Development Expenditure Credit (RDEC) scheme – this is for large companies and covers those that fall outside of the SME scheme i.e. where staff numbers are above 500 or turnover is more than €100million or balance sheets total more than €86million in gross assets. Companies claiming under this scheme can apply for relief on 11% of their qualifying R&D expenditure.
For both schemes, companies don’t actually have to be making a profit to be eligible to make a claim.
What qualifies as Research & Development (R&D)?
It can prove complex when determining what R&D expenditure qualifies for tax relief. It is probably the part that most companies struggle to understand and find off-putting. To overcome this, businesses should start by asking themselves the following key questions:
- First and foremost, are they involved in any new projects?
- If so, does this project involve any element of research and/or the development of new products, services and processes linked to science or technology?
- Will these new products, services and processes help the wider industry? Look beyond the immediate benefit of the project to your company. Is what you are doing contributing new knowledge, or does it have the potential to? Does it have the ability to change existing processes and ways of working? Are you tackling a challenge that’s unresolved throughout your industry?
Even if you are unsure about whether you have a definitive ‘yes’ or ‘no’ answer to these questions, don’t let it prove to be a barrier to your understanding of your eligibility. With the right expertise, qualifying spend can be quickly pinpointed and R&D tax credits estimated.
What R&D costs are eligible for claims?
Companies can make claims on staff salaries including class 1 National Insurance contributions and pension fund payments. This will only be applicable to staff working on the R&D project, including those that are ‘hands-on’ as well as management. Claims don’t just cover full-time staff either. Companies can make claims for externally provided staff, which they may have recruited via an agency to specifically work on the R&D project.
Beyond staff costs, companies can make claims on expenditure for consumables, software, independent research and prototyping associated with the R&D. As a general rule, the cost that tends not to qualify is capital expenditure and costs incurred through the production and distribution of goods and services.
What do I need to do to submit a claim?
Claims are made via your Corporation Tax Return form. As a starting point, if you are able to provide an overview of the R&D project that you’re involved in, including when it started, its objectives and intended completion date, as well as a summary of all total expenditure, one of our experts can quickly determine what’s eligible under the current scheme.
As a final point, proposed changes to the R&D tax credits scheme were outlined by the government in last year’s budget. These are due to take effect from April 2020 – check back here in the future to learn more or contact one of our experts to find out how these might effect your company.
To find out more about The Coalition for a Digital Economy (Coadec), click here to visit their website.