As discussed in last week’s blog, ‘Can I Save Tax Through R&D Relief’, research and development reliefs can offer a huge potential saving to eligible companies. But what kind of companies qualify for R&D credits – and how can you claim?

What Makes A Company Eligible to Claim R&D Credits?

In the words of HMRC, a suitable R&D project aims to resolve a ‘scientific or technological uncertainty’.

However, contrary to popular belief, such as project doesn’t revolve around lab coats or test tubes; in fact, almost any company that invests in innovation – specifically when that investment has been made with the purpose of developing problem-solving technology – will qualify. There are many companies making such investments and working on eligible projects; but because they don’t have an R&D department, or the project isn’t actually being run by the R&D department, they don’t realise – and hence end up paying a great deal more tax than they need to.

If your business has conducted any of the following actions with the aim of making an advancement, you may qualify for R&D relief:

  • Found an operational issue and spent time trying to puzzle it out;
  • Experimented with different manufacturing processes or equipment;
  • Tried to improve products or services by investing in the development of existing or new technology; or
  • Created new products or services through technology.

Bear in mind that the success of the project isn’t necessarily the most important thing (more on that below) – so organisations should not be tempted to choose something that is simple to solve! Rather, in order to qualify, the issue needs to be sufficiently complex so that it couldn’t easily be answered by a ‘competent professional’. However, it doesn’t need to be a rare issue within your industry; a competitor could even apply to try and resolve the same uncertainty at the same time and you would both still be eligible for the credit (provided that the answer to the problem has not already been published in such detail that others within the same profession could replicate it without the need for further exploration).

As mentioned above, whilst most business-owners would be reluctant to embark on an investment without strong hope of success, for HMRC purposes this is not of primary importance – and failure does not negate a company’s eligibility for R&D credits. It is the willingness to seek inventive solutions to an uncertainty that allows a company to procure a tax credit.

What Kind of Expenditure Can R&D Credits Support?

The first thing to consider is the time period for which you’re hoping to claim for. In terms of HMRC, the project begins when you began working on the uncertainty, and it ends when you either resolved the issue or decided to stop working on it.

Over that time period, you’re able to claim for a number of expenses including (but not limited to):

  • Staff – direct involvement. For staff directly involved with the project, you can claim a proportion of their wages, NICs, and pension fund contributions.
  • Staff – secondary support. You can also claim for admin support – say if a member of staff had to be recruited specifically for the project and this was done internally – but not when it comes to carrying out duties that are part of a staff member’s normal job (such as administrating payroll).
  • If the project is being run by a small/medium sized enterprise, it’s possible to reclaim 65 of the cost of bringing in a subcontractor to work on a project.
  • Any consumables used during the R&D, such as materials or utilities.

How to Claim for R&D Credits

Filing a claim for R&D credits without specialist advice is possible, but mistakes can be costly. In order to make your claim, you’ll need to cover two key elements: technical reporting and financial documentation.

In the technical section, you will need to demonstrate what work was carried out; what challenges you faced; what technical uncertainty you tried to resolve; and why this was necessary (i.e. how it was not possible for this uncertainty to be otherwise solved by a competent professional). The financial section will need to include various details, including your headline figures, and calculations to do with labour expenditure and consumables.

Bear in mind that R&D credits are just part of an overall tax position, and it could be years before HMRC examines the claim that you have submitted. There have been instances where incorrect information was filed year on year before being detected, meaning that the organisation in question incurred penalties, fines, and then had to waste a great deal of time trying to rectify historical mistakes.

The better option is to get it right the first time, of course, and this can only be guaranteed by instructing a qualified accountant or tax adviser. At IBISS & Co we can help ensure that your financial reporting is correct and up to date, whilst making certain that you are taking advantage of any and all available reliefs. Contact us today to learn more about our comprehensive range of services.

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