Research & Development Tax Relief: Can you claim?

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    The Government has announced an increase of £22bn by 2024-25 of tax relief per year for public research and development (R&D) activities plus a further £1.5bn across all regions and nations. What does this mean for you?

    If your company has undertaken some R&D work, or even if you’ve worked for another company on their R&D project, you might be able to get a slice of the action.

    Are you due R&D tax relief?

    Think you might be due a bit of Research and Development tax relief? If you’re a Crunch client, we can help. Your client managers will be able to look into your case and our expert accountants will advise on the best next steps.

    If you’re not a Crunch client, what are you waiting for? Find out about our great limited company accounting service and arrange a free consultation with one of our advisors today.

    What classes as R&D?

    Before we explain how and what you can claim, it’s best to nail down exactly what the Government classes as Research and Development.

    Sadly, simply spending money developing a product that you believe to be commercially innovative isn’t enough - the Government will want to see you’re investing in something that’s aiming to advance science or technology.The key requirements are that the project must:

    • be seeking an advance in the field of technology or science
    • be considered commercially innovative
    • incorporate science or technology that is not readily available in your industry
    • relate to your company’s trade - you must be intending to use the findings for your business

    Additionally, your company must not currently be receiving state aid or subsidised expenditure.

    There are also restrictions on the type of expenditure you can claim R&D tax relief on. Any expenditure you want to claim must be for revenue costs (i.e. those related to daily running costs). Capital assets - such as those for equipment and buildings - don’t qualify.

    The expenses must also fall into one of a set list of categories, including employee costs, materials, software, and consumables.

    Some examples

    To give you an idea of who can claim, here are a few real-world examples of Crunch clients who, with our help, managed to successfully obtain R&D tax relief.

    Content marketing company

    The company's vision was to create a solution for content marketers and technical companies focused on key areas, including social media management, content marketing, and speech writing. The company engaged in R&D activities to develop a bespoke web platform, providing relevant, personalised, and curated technological contents as well as an analysis of marketing score for their clients' industry and market. The project's field of science and technology was content research and data management software.

    Creative software development studio

    Our second example is a company that helps brands and corporations understand and implement innovative virtual and augmented reality technologies. The company was acting as a subcontractor to deliver a particular technical solution to a large corporation, which retained the intellectual property arising.

    Both companies were eligible for Research & Development tax relief.

    When do I need to claim for Research and Development tax relief?

    The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period. You can make your claim for R&D tax relief in your Corporation Tax return or amended return.

    Types of relief you can claim

    There are two schemes available to small businesses: the Small and Medium sized Enterprises (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme.

    Before we go into the details of each, here’s a quick overview of what can be claimed under each scheme:

    Scheme Tax year Enhanced deduction* Payable credit (loss making) Relief
    SME scheme 2019/20 230% 14.50% n/a
    SME scheme 2020/21 230% 14.50% n/a
    RDEC scheme 2019/20 n/a n/a 12%
    RDEC scheme 2020/21 n/a n/a 13%

    *Enhanced deduction is the total amount of the actual expenditure, plus 130% relief

    The SME Scheme

    As its name suggests, the SME scheme is aimed at small and medium-sized enterprises. However, the definition of an SME varies. For R&D purposes, an SME is defined as one with under 500 employees and either an annual turnover of €100 million (Euros) or a balance sheet under €86 million (Euros). If your company is part of a larger company that falls outside of this definition, or is in liquidation or administration, you won’t be able to make a claim.Here are some examples.

    Example 1 (profit-making SME):

    Taxable profits (before R&D claim) £200,000
    Corporation Tax liability on profit at 19% rate £38,000
    R&D expenditure (included in the profits above) £100,000
    Tax credit value of R&D expenditure (130%, so 1.3 x £100,000) £130,000
    Adjusted taxable profit before corporation tax (£200,000 - £130,000) £70,000
    Adjusted Corporation Tax liability at 19% rate £13,300
    Corporation Tax saving (£38,000 - £13,300) £24,700

    Example 2 (profit-making SME)

    Taxable profit (before R&D claim) £400,000
    Corporation Tax liability on profit at 19% rate £76,000
    R&D expenditure (included in the profits above) £320,000
    Tax credit value of R&D expenditure (130%) £416,000
    Adjusted taxable profit before Corporation Tax (£400,000 - £416,000; so a £16,000 loss can be carried back to the previous year or forward to next year) nil
    Adjusted Corporation Tax liability at 19% rate nil
    Corporation Tax saving £76,000

    Example 3 (loss-making SME)

    If an SME successfully applies for R&D tax relief and, as a result, makes a loss for Corporation Tax purposes, the loss can be:

    • carried back to the previous accounting period
    • carried forward and offset against future profits
    • surrendered to HMRC in return for a tax credit.
    Trading Loss (before R&D expenditure) £100,000
    Corporation Tax (not applicable as making a loss) nil
    R&D expenditure £50,000
    Surrenderable loss is the lower of: Unrelieved Trading Loss ( £100,000 + £50,000) = £150,000 or 230% of qualifying R&D expenditure  (£50,000 x 230%) = £115,000. In this case the lower amount is £115,000 £115,000
    Refund (tax credit) for R&D activity (14.5% of £115,000 ) £16,675

    The RDEC scheme

    If you're a subcontractor working via your limited company, you may be able to claim under the RDEC scheme. If your company is engaged in a contract with a large corporation to carry out R&D activity, where the large corporation will have the rights to the intellectual property, you could be able to claim the R&D tax relief.

    From 1st April 2020, the RDEC percentage increases to 13%. So, combined with the Corporation Tax rate of 19%, the net cash benefit to a large company is about 10.5% of its qualifying R&D expenditure.

    Example (subcontractor working for a large company):

    R&D Expenditure £100,000
    Credit Rate 13% £13,000
    Gross credit amount (to be included in taxable profits) £13,000
    Corporation tax at 19% £2,470
    Total tax credit (£13,000-£2,470) £10,530

    If your company is micro, small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the RDEC scheme for another.

    Crunch can offer individual advice to our accountancy clients on whether you're eligible for R&D relief and how to claim. If you'd like to become a Crunch client find out more about our limited company accountancy or speak to one of our advisors on 0333 311 8000 to see how we could help your business.