Research & Development (R&D) tax reliefs are HMRC incentives created to encourage innovation and technological advances in the UK. R&D tax relief is a widely available, but often overlooked tax relief.
Broadly speaking, the relief applies to companies undertaking projects which aim to seek an advance in science or technology. Guidelines set out by HMRC state that qualifying projects must constitute an advance in the overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.
Initially, when the relief was announced in 2000, R&D tax credits were only available for SMEs. Two years later, a similar regime for larger companies was introduced; followed by the optional ‘Above The Line’ (ATL) R&D tax relief for larger companies in 2013. However, the definition of SME for this purpose is quite high so many companies will qualify for the more generous relief available to SMEs.
R&D relief may allow companies to reduce their corporation tax bills. For SMEs, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HMRC.
Since the introduction of R&D tax credits the rates of relief have increased significantly and the qualifying conditions relaxed. Subsequently, more companies than ever are claiming R&D tax relief on projects. Figures released by HMRC in 2014 found that since the relief was launched over 100,000 claims have been made and £9.5bn in tax relief claimed. However, it is still believed that many companies who have qualifying projects are not claiming.
The two main reasons for a company not claiming R&D tax relief are:
- They do not understand the tax legislation and claim process
- They do not realise that they have qualifying R&D projects
It is important to understand the broader range of qualifying activities for R&D to ensure that less obvious tax relief opportunities are not missed. It is often the case that many companies are unaware of which activities qualify as R&D; subsequently leading to many lost opportunities.
For some projects it is easy to determine whether a project meets the qualifying criteria. However, because of the subjective nature of conditions, the basis on which a project qualifies relies on a number of factors and this can make it difficult to review the eligibility of many projects.
For example, some of the following key questions should be considered:
- What were the scientific or technological advances sought?
- How were the uncertainties overcome?
- Did the project have a clear purpose form the outset?
- Did the project achieve scientific and technological advances in the marketplace?
- Why was the knowledge being sought not readily deducible by a competent professional?
- When were the uncertainties actually overcome?
It is recommended that you seek professional advice from someone who has experience in dealing with HMRC and fully understands qualifying criteria for R&D tax relief.
After an initial assessment of the eligibility of the project, we can then submit the claim to HMRC.
Claiming R&D tax relief can be a complex and detailed process.
It is important the person submitting the claim has experience of the R&D tax relief claiming process and negotiating with HMRC. This will undoubtedly reduce the number of mistakes made during the claiming process and ensure that all qualifying R&D projects have successful claims.
If you would like to discuss any of the topics covered in this article or you wish to seek advice on claiming R&D tax relief for your business, please contact our specialist tax advisors at Hawsons. We offer all new customers a free initial, no-obligation consultation.