R&D Tax Credits are of frequent interest to a small company in technology related environments.
How do they work, and what can be claimed?
HMRC has some comprehensive guidance at: Claiming Research and Development tax reliefs and it would be foolish to try and repeat that here. Instead we will address the “headlines”
What counts as R&D?
First, what counts as R&D? HMRC state “Your company or organisation can only claim for R&D Relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”
They also state “It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.”
In short, R&D must involve:
- A scientific or technological challenge
- Uncertainty that could not readily be resolved by a competent professional
- A genuine attempt to achieve an advance in that field
What costs qualify?
Once a project qualifies as R&D, only certain categories of expenditure can be included in a claim. In broad terms, HMRC allows relief for costs that are directly attributable to carrying out the R&D activity itself:
These typically include:
- Employee costs – Salaries, employer’s National Insurance and pension contributions for staff who are directly and actively involved in R&D. Staff must be employed by your company under a contract of employment.
- Externally provided workers (staff providers) – Payments to staff providers for workers who are directly engaged in R&D activities, where the provider contracts directly with the individual supplying the services.
- Consumable materials – Physical materials that are consumed or transformed in the R&D process, such as prototypes and testing components. This does not include telecoms, data or general office costs.
- Utilities – Power, water and fuel used directly for R&D activities (but not telecommunications or data costs).
- Software – Computer software used directly in carrying out R&D.
- Subcontracted R&D – Under the SME scheme, a company can normally claim a proportion (typically 65%) of qualifying R&D work carried out by subcontractors. Special rules apply where the subcontractor is connected to the company, and different rules apply for larger companies under the RDEC scheme.
- Capital expenditure – R&D tax relief applies only to revenue (day-to-day) costs. However, where capital assets are used for R&D purposes, it may be possible to claim relief instead through R&D capital allowances.
If you own a business and are considering a R&D claim, a couple of pointers to be aware of:
- Dividends are not eligible payroll costs – so where directors have a low salary/high dividend mix, this will need to be switched to salary.
- R&D claims are a hot area for consultancy sales, sometimes with less eithics than desirable – do check the credentials of anyone advising you.
This is an area of taxation that in experiencing rapid change, with a new system of relief from April 2024, and historically high levels of fraud attracting HMRC scrutiny. Please take specialist advice on the latest position.