You may have seen in the Autumn 2018 Budget that there will be changes made to Research & Development (R&D) tax credits coming into force in April 2020. Need to know if this will affect you? Read on.
What are Research & Development (R&D) tax credits?
R&D tax credits reward UK companies for investing in innovation, for example, by developing new or improving products or services. Companies receive this valuable government tax relief as a cash payment and/or Corporation Tax reduction up to 33p for every £1 of qualifying expenditure. Eligible companies can claim for the last two completed accounting periods.
The tax credits are calculated on your R&D spend which is deducted from your taxable profits or added to your losses to give a Corporation Tax reduction (if in profit) or a cash credit (if loss-making) or a combination of both. R&D tax credits are sometimes used as an alternative to or in addition to applying for funding through innovation grants.
What activities does ‘Research & Development’ cover?
HMRC has a wide-ranging set of criteria for R&D requirements. No matter the size of the business or the sector it operates within, if you are embarking on a project that may not be scientifically or technologically possible, or you don’t know how to achieve it in practice, then your activity may qualify.
The project need not be successful to meet the criteria and can also include work you’ve carried out for a client. These types of expenditure count as R&D:
- Staff (including salaries, employer’s NIC and pension contributions)
- Subcontractors and freelancers
- Materials and consumables
- Some software types
Latest update on R&D tax credits
From 1st April 2020, a cap on the amount of refundable R&D tax credit available to loss-making SMEs will return. The amount of refundable credit is proposed to be capped at three times the PAYE and NIC payable for the year.
Any unused enhanced losses will be carried forward as trading losses to be utilised when the company turns to profit. HMRC is expected to consult further on the detail and there may be a potential relief or exemption for small start-up businesses.
HMRC says almost 95% of companies that already claim the tax credit will be unaffected but there will be some losers – genuine companies with UK R&D activity that have low PAYE and NICs liability relative to their R&D spend. These companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits.
Why has HMRC taken this step?
The cap on R&D tax credit is an anti-fraud measure, to help prevent abuse of SME tax relief by artificial corporate structures which often have few or no employees and are based outside the UK. £300 million of fraud has already been prevented and this step will address future abuse of the system. The cap will therefore ensure that the relief goes to companies that have a real UK presence.
Who can claim R&D tax credits?
It is a common misconception that R&D tax credits are just for the technology sector and many companies in other areas fail to claim their R&D tax credits. If your company incurs costs in overcoming technical uncertainties, then you may have a valuable claim to make.
Innovation in research and development happens in all business sectors from automotive and aviation, through manufacturing, electronics, food, energy and insurance. We have helped many of our clients to claim back money that they didn’t realise was available to them. Our specialist R&D team will ensure that your claim is accurate and robust, to stand up to any HMRC scrutiny.
If you need to overcome technical uncertainty in your business, then you may find it useful to read our briefing notes with sector-specific examples of typical qualifying claims //crmoxford.co.uk/news/rd-tax-relief-typical-claims-see-briefing-notes/ or call us on 01865 379272 for more information.