de Jong and Phillips LLP

Research & Development Tax Credits: The hidden gem that you may be missing out on!

By Ryan Meredith

If you are undertaking a project, that is bespoke within your industry, there is a chance that you don’t even know that your expenditure may qualify for Corporation Tax relief. This tax relief can be a valuable source of cash for businesses who are investing in growth.

What qualifies for Research and Development (R&D) tax credits

Qualifying Research & Development expenditure as defined by HM Revenue & Customs as “Work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It can’t be an advance within a social science like economics or a theoretical field like pure math.”

Ask yourself these four fundamental questions to assess whether you may be missing out on one of the government's most generous tax reliefs:

  1. Have you made a scientific or technological advance in your chosen field?
  2. Were you required to overcome uncertainty?
  3. Did you attempt to overcome this uncertainty?
  4. Could any other professionals in the field have worked out the same advancement, easily?

How will R&D Tax credits benefit me?

If you qualify for Research & Development Tax Credit Relief (R&DTCR) they could significantly reduce your corporation tax bill, alternatively, if you are loss making you may even be entitled to receive a tax credit, in cash!

Technological advances can extend to include: App development, website functions, bespoke internal systems and many other areas. The projects do not have to be big!

So what are the reliefs and how do they work?

An enhancement of expenditure is applied to your qualifying expenditure when calculating your total taxable profit. This is at a rate of 130%.

This means that your profit for Corporation Tax purposes would be reduced by an additional 130% of the total qualifying expenditure on top of the original 100% R&D expense. Great news if you have corporation tax to pay!

Now lets see this with an example. Assuming that the total qualifying R&D Expenditure for a project is £100k then the R&D enhanced expenditure would be £130k (£100k x 130%) and the additional Corporation Tax saving on that would be £24.7k (£130k x 19%).

So now you ask, what if my company is loss making as the project has not yet derived any income?

In this scenario, you can apply to have a tax credit, receivable from HMRC by surrendering the loss in exchange for a 14.5% tax credit. The below details an example of this, again based on qualifying R&D expenditure of £100k:

R&D expenditure (actual cost)                £100,000

R&D Enhanced expenditure                     £130,000

Total R&D surrenderable loss                  £230,000 (actual R&D expense plus enhanced expenditure)

Tax Credit (14.5% x £230,000)                     £33,350 (14.5% x £230,000)

Do you think you may be eligible for R&D Tax credits?

As the above has demonstrated, there may be an opportunity to assess your business to see if you can qualify for R&D tax relief.

There is a deadline for this claim, this is 24 months from the financial year end date in which the expenditure was incurred. If you think you qualify, act fast!

If you would like to discuss a project's eligibility get in touch with the team, we will be more than happy to help.

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