R&D Tax for Small busineses – Research & Development tax relief

What Exactly Are Research And Development (R&D) Tax Credits?

Research and development or R&D tax credits are incentives from the government engineered to reward UK businesses for investing in innovation. They are, therefore, a valuable source of money for companies to invest in improving their R&D. They can also use the cash to hire new staffs and ultimately grow their businesses.

Small and medium-sized enterprise (SME) R&D can claim for the following:

  • Can deduct an extra 130% of their qualifying R&D expenditure from their profit, plus the normal 100% deduction, this is a total of 230% deductions.
  • A loss making company can claim a tax credit , the rate is 14.5% of the surrenderable loss
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The money is refunded in different ways. For one it can be paid as a negative corporation tax or as a tax refund at the end of a financial year.

Examples of R&D costs are supporting software/Saas, subcontractor costs, testing, management, prototyping, technical analysis and developing manufacturing processes.

Who Qualifies For R&D Tax Credits?

R&D covers all sectors. It takes place in everything from digital development to construction and from chemical engineering to cheese-making.

However, you must provide proof to the HMRC that your technology was complex. Here you must submit technical and financial details of your innovations. The HMRC has detailed criteria, and your R&D must meet them.

1. Technology

One rule of qualification though is that a project qualifies to be R&D if it offers a modification to an existing service, process or product.

If it’s not yet clear whether or not you are having qualifying R&D, here are some illustrations:

If you have a platform whereby people can upload videos using image recognition to tag and analyze these videos, then you might qualify.

There are logistics in business that auto determines how products will be shipped to the appropriate locations on time. The same logistics also determine the most reasonable price to sell those products in those locations. If you have such a platform then you might qualify.

However, you will not qualify for R&D if you deal with setting up a Drupal site or WordPress.

Besides those platforms, the qualification also depends on factors such as performance and scale. Here are examples on that:

If a search tool offers quick results when a person searches across terabytes of data from thousands of corporate shared drives, then it might qualify. However, if the tool searches across a few and simple documents stored on a hard drive, then it cannot qualify.

A site that allows people to send images and short messages to 400 million active users every day, it might qualify. But if the website enables them to share the images or messages between each other than it will not qualify.

2. Cost

If your innovation did cost you at least 100k or more on skilled engineers/developers to create it, then it probably might qualify.

3. Technical Uncertainty

At times you might be developing a product/service and you are not certain whether it could be created to the recommended specification. In such a case the outcome is uncertain and the innovation could be R&D.

4. Innovation

Speaking of innovation, you might have succeeded in projects that others have failed in. in such a case, your innovation could probably be Research and development.

As for those participating in common innovations that other people can easily do, then that is not R&D.

5. Qualifications

As for qualifications, the thumb rule applies here. Let’s say you have competent and smart people with formal qualifications who spend lots of time on a project. If so, then it could be an indication that the project is R&D.

On the other hand, if your technology does not involve such skilled people, it might not necessarily imply it is not R&D. Have a look at other details on technology.

Technology Qualifies For R&D Under These Circumstances:

1. The Finances

For technology to qualify, you must have spent lots of money developing it. Not only spending money but do so in the right way that convinces HMRC to consider you for R&D tax relief.

2. Rules
Apart from finances, your company must be UK based to qualify for R&D Tax Credits.

Additionally, your UK business must have spent finances creating a technology that adheres to the aforementioned criteria. Some of the ways of spending money on technology include:

i) PAYE deductions for employees
ii) Buying materials for the project and the excess ones can’t be sold for full value iii) Paying subcontractors to deliver your project
iv) Software licenses for delivering the project

The spending, however, must be within the last 2 financial years – at times 3 years.

While there are other details, you might qualify for R&D if you meet those criteria. The Pricing of R&D Tax Credits

There are several government funding specialists in the UK. Each has their own pricing for R&D filings. But as for us at GM, we charge 15%.

What sets us apart from the rest is that we are transparent. As in we don’t have hidden fees or charges. Our pricing varies based on your research and development expenditure. Nonetheless, we focus on advancing your R&D Tax Credits using our special Advance Funding product.

How Much Refund Will You Get?

The tax refund depends on your specific situation. However, there is a rule of the thumb used here, which is:

i) A large business doing R&D gets around 11% of its R&D costs refunded.

  • Can deduct an extra 130% of their qualifying R&D expenditure from their profit, plus the normal 100% deduction, this is a total of 230% deductions.
  • A loss making company can claim a tax credit , the rate is 14.5% of the surrenderable loss

So far everything sounds great, but how do you get the refund?
First, you should write a technical narrative and make it as convincing as possible. In the narrative, ensure you include a clear table of all the financial calculations.

Once done, amend the CT600 and file it with HMRC. From there you can decide whether to file it yourself or hire a specialist like GM. If you are a DIY person and want to handle everything, you can proceed. Just ensure you fill details in the correct boxes in the CT600.

Along explain why your innovation qualifies for R&D Tax Credit. Include a calculations table to support your claim amount.

The idea is to convince the HMRC that you know what projects and costs qualify for R&D. if your application is successful, you’ll receive your refund in the next two to eight weeks.

In case MHRC thinks your filling is incorrect, you will get an HMRC inquiry. It entails several questions, which will delay your refund. The worst it can get is gruelling meeting along with penalties for incorrect filling.