1) R&D Tax Credits Explained
R&D Tax Credits (or R&D Tax Relief) is a credit paid by HMRC based on expenditure made on “qualifying R&D projects”. Essentially it allows a business to claim more expenses, reducing their tax bill – in some cases by quite a significant amount.
If your company is lossmaking, then you can get a cheque direct from the taxman, and if it’s possible you get a reduction in your tax bill. The calculation, eligibility and process is complex, and professional help is often a very good idea to seek.
2) Is my Business Eligible?
There are two main types of R&D tax relief paid – small and medium business relief, and Research and Development Expenditure Credit (RDEC). RDEC is paid out for larger companies, and won’t be covered in this guide.
For the purposes of R&D, small businesses are eligible if they have less than 500 employees and a turnover of under €100m or a balance sheet total of less than €86m. However, virtually every company registered for corporation tax in the UK will be eligible.
3) Is my Project Eligible?
There are four key criteria for a project to be eligible. The project must be specific, with clear goals, and cannot relate to social sciences (psychology or economics, for example) or be purely theoretical – like a project making a mathematical theory. We’ve created an infographic below to summarise this, but the reality is that this area is quite complicated. As chartered accountants, we understand the need to be careful about claims for R&D tax credits, so we encourage you to get in touch with us if you think your project might qualify or is borderline. You could be in line for a significant tax rebate!
4) How do I calculate R&D Tax Relief?
You can claim for a number of things when it comes to tax relief. The main areas are:
- Employee Costs
- Software and Consumables
For employee costs, all relevant costs are allowable (that’s salary, national insurance and pension contributions). You need to apportion staff time, however, to how much time they spent working on the project. Usually you’ll need to use timesheets to do this. Andach can help with our HR outsourcing service – providing secure, online timesheets for all your staff – salaried or hourly paid.
Of course, if you don’t have timesheets, you’ll have to use a reasonable estimation. You can claim for admin or support staff who work to directly support a project. The example HMRC gives is that if a specialist member of staff had to be recruited, and that took up a lot of one of your HR adviser’s time for a while, you could claim for that.
You can’t claim for day-to-day admin that would have to be done anyway, like payroll.
Subcontractors and other costs
Subcontractor costs are limited to 65% of the relevant costs or payments made to an external agency.
Other costs, including software and consumables, are virtually all calculated on a “share of use” basis. If you had to buy new or specific software or materials, then this is all allowable. If you’ve got 3 people working full-time on the project, and 10 members of staff overall, then you could claim for 30% of general software costs (say, Microsoft licensing).
5) How can Andach help me?
Whether you’re an ongoing client or not, we’re happy to engage with you and complete your return on your behalf, or just help you with understanding and calculation.
When you call us (remember, we don’t ever charge for initial consultations) we’ll ask about your project to see whether it’s likely to qualify. If so, we’ll arrange a time to go through it in slightly more detail, and might have a chat with some of the people working on the project to get a feel for the technical aspects of it. With the current COVID situation, we’ll try to do a lot of this remotely for obvious reasons.
Once we’re happy your project will qualify, we’ll work with you to calculate the costs. If you’re not a client of ours, we’ll ask for an extract of your purchase ledger and/or timesheets.
We’ll then do your calculation and produce a draft submission for you to once over. We’ll deal with all the communication from HMRC directly on your behalf. There’s nothing to lose by calling us, and you could be on the way to receive a large cheque from the taxman!