IS MY BUSINESS ELIGIBLE TO CLAIM
Assessing R&D Activities
A frequent comment we regularly hear is, ‘What we do isn’t Research and Development’. Although this may be true in the commonly accepted view of R&D, it doesn’t mean that you won’t qualify for R&D Tax Credits. In fact, there are lots of ways that your project may qualify for R&D tax relief. One key factor for assessing a project’s eligibility is whether your aim is to make an advance in science or technology. But what does that mean and what is an ‘advance’?
In the commercial world, companies are often looking to reduce costs. One way of doing this is by developing efficient systems and processes. You may be looking for a better way to use your resources or to produce less waste. You may wish to create faster manufacturing, development or design processes. This would apply equally for either the development of a new product or process, or the improvement of an existing product or process.
What’s an ‘Improvement’?
What constitutes as a ‘scientific or technological’ advance or an ‘appreciable’ improvement will vary from sector to sector. If you’re looking to improve something by turning it into a reliable and cost-effective product or service, then it may qualify as ‘Research and Development’.
We’ve listed some examples below:
- Process Industries – there may be new environmental legislation that you need to meet.
- Manufacturing – you might be looking to reduce your component count or increase reliability.
- Software development – your key drivers might be to improve security or reduce system overheads.
- Food – improving the product quality and consistency.
Your Project Doesn’t Have To Be Successful
One common misconception is that a project needs to be successful to qualify for R&D tax relief. If you fail to achieve an advance, this doesn’t disqualify your project from being considered eligible. In fact, it can actually help to demonstrate that you’ve experienced a significant technological challenge. In reality, what’s important is that an advance or improvement was sought in the first place.
If you’re seeking to improve how you make something, how your product performs, or how much it costs to make, this may qualify as R&D. As there is often more than one way to achieve an effective solution, such improvements usually require research and development.
What Costs Can I Claim?
R&D Tax Credits are a form of tax relief available to limited companies. There must be a liability to Corporation Tax (CT) in order to be eligible and your business must be involved in qualifying activity. This is defined as “activities that contribute directly to the attempted advance and certain essential administrative or supporting activities”. You are allowed salaries, the cost of employment, including National Insurance and Pension contributions, within these main costs. In some cases, you might be able to claim for materials, although due to recent changes in legislation, there are restrictions.
Whether you’re a large company or an SME, the rules on what constitutes R&D activity are exactly the same. The only difference is that SMEs are allowed additional deductions in the profit calculation. A large company would receive an RDEC – Research and Development Enhanced Credit, which is applied above the line in your company accounts. SME tax relief is applied below the line. Currently, the RDEC is calculated at 12% of any eligible R&D costs, but it is then taxed.
If you have questions about how R&D tax relief might apply to your business, please get in touch.
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