The RIFT All-in-One Guide to R&D Tax Credits Claims
The world of Research and Development Tax Credits can look a little murky and confusing from the outside. That’s one of the reasons why so many innovative businesses miss out – the other being that they never even realise the opportunities it offers. The R&D Tax Credits system covers a lot more than most people think, so here’s a simple guide to what it means for your business.
R&D Tax Credits? Never heard of them
To put it simply, the R&D Tax Credits scheme is the largest and most rewarding incentive programme of its kind. If your business is spending cash on solving technical problems and answering important questions, you’ve already got a good chance of qualifying.
The scheme is all about making sure your biggest and brightest ideas always pay off – even if your projects don’t. When you’re doing R&D, you’re not just solving an immediate problem for your own business. If you’ve struggled with a technical obstacle, there’s a good chance others have too. R&D boosts business throughout the whole economy, and the government wants to make sure your most inventive work is always rewarded.
We’re serious about still benefitting if your projects don’t work out, too. Your R&D doesn’t have to actually produce the results you were hoping for to qualify for tax relief. The important thing is that you’re spending money on attacking the problem. Basically, if you’ve got smart people burning brain cells on your project, then there’s probably some R&D going on.
What is R&D? Could my business qualify?
The first thing to understand about R&D is that it’s not all about lab coats and Bunsen burners. You don’t need to be working in full-on mad scientist territory to be eligible for R&D Tax Credits. Any time you’re pumping time and money into pushing back the boundaries of what we know and what we can do in a technical field, there’s a good chance there’s some qualifying R&D in there. That includes:
- Finding innovative new uses for existing technology.
- Making your products or processes more efficient or effective.
- Developing, prototyping and testing new products, services or ideas.
- Getting business done in a safer, cleaner or “greener” way.
How much is on offer?
What you can get from R&D Tax Credits depends on a few factors. The first thing to look at is what size of business you’re running. Small or medium-sized enterprises (SMEs), for example, claim under a different set of rules from larger firms or groups. For a basic guideline, you’re an SME if:
- You’ve got fewer than 500 employees.
- Your turnover’s under €100 million.
- You’ve got assets of under €86 million.
If you qualify for the SME scheme, you can deduct 130% of your qualifying costs from your taxable profits (on top of the 100% you can already deduct). If you’re making a loss, you can claim a tax credit worth up to 14.5% of your loss for the period you’re claiming for.
If you’re not an SME, then you’ll be using Research and Development Expenditure Credit (RDEC) for your R&D claims. Under RDEC, you can get a tax credit worth 12% of your qualifying costs. If you’re making a loss, you can take it as a cash payment.
A couple of wrinkles in the system to be aware of: even SMEs can find themselves claiming under RDEC sometimes. If you’re subcontracted to a larger firm or part of a group, for instance, you might lose your SME status for the purposes of the scheme. The same thing can apply if you’ve had a grant or subsidy for your R&D work.
What’s involved in an R&D Tax Credits claim?
So, this is where the biosourced rubber meets the solar panelled road. Making an R&D Tax Credits claim isn’t something you just decide to do at the last minute. At least, it’s not if you actually want to make something worthwhile out of it. Tracking down the R&D going on in your business is pretty much a science in itself. In industries with a history of under-claiming for R&D (construction, for example), the main culprit is simply people not understanding how broad the R&D field is. So much innovative work gets buried in the foundations of construction, because solving complex problems is just an average day at work in the building game.
Getting R&D right is about shifting the whole mindset of your business. You’ll need precise records of your potentially qualifying expenditure, along with well understood systems for tracking it whenever it happens. Pretty much every level of your business will need to be on the ball about this. When you’re right at the start of your journey, you won’t necessarily know every problem you’ll have to solve along the way. That means you won’t always know in advance how much R&D you’ll be doing. Spotting and recording your R&D costs when they crop up is a huge part of any successful R&D Tax Credits claim, so get organised!
Assuming you’ve pinpointed all your qualifying projects and expenditure, it’s time to make your claim. Whichever scheme you’re using, an R&D Tax Credits claim starts with your Company Tax Return (form CT600). If you need to give more information to back up the expenses you’re claiming against, you can do that online at HMRC .
The Technical Narrative
In addition to the raw numbers you’re sending, a key building block of your claim is what HMRC calls your “technical narrative”. While that sounds pretty vague, what they’re asking for here is proof that the costs in your claim actually qualify for tax relief.
This is where you need to show that you fully understand the R&D scheme you’re claiming under, and that you’ve done enough homework to apply its rules correctly. On top of all that, you’ve got to join the dots clearly for HMRC between the research you’ve been doing and the money you’ve spent. You can’t just pull the numbers out of the air, and you need to demonstrate how that money went into complex, technical work. A weak technical narrative won’t score you the pay-out your innovation deserves – and can even lump you with some nasty knock-on effects. Which brings us to…
Are there any pitfalls or dangers to watch out for?
Okay, so you’ve identified your R&D projects and itemised their costs. You’ve filed your claim correctly – but you skimped on your technical narrative and HMRC isn’t satisfied. What sort of trouble are you looking at?
If you’re lucky, you may just have to answer a few follow-up questions from the taxman. You might get a letter asking for clarification on some points. If your claim’s fundamentally on the level, you probably won’t have much to worry about. Of course, if your technical narrative or bookkeeping have been scrappy enough to raise HMRC’s eyebrow, then you probably haven’t caught all your qualifying expenditure in the first place, meaning -at best - a lower pay-out than your work deserves.
Depending on the situation, HMRC might raise the stakes with a personal meeting. This doesn’t always mean anything’s gone seriously wrong. It might just be that you’re making your first claim and they want to take a proper look at you before okaying your tax credit. If a mistake in your claim is found, you should get a chance to correct it.
Another step up from this is when HMRC actually thinks there’s something either very wrong or actively crooked about your claim. This is called an “aspect enquiry”, and it can be a bit of an ordeal. To be fair, though, you’re probably not being accused of anything suspicious here. They might just be worried that you haven’t understood what the R&D scheme’s rules mean. Also, this isn’t some massive full-scale attack on your business. Aspect enquiries are typically very tightly focussed, and you could easily still walk out with part of your claim being greenlit. If things ever did escalate to a full-on enquiry, it basically means you’ve given them reason to suspect you’re up to something deeply dodgy. Do try to avoid this.
What happens next?
Once your claim’s approved, whether fully or partially, you’re generally looking at a wait of several weeks before it’s all settled. Again, a lot depends on how thorough and accurate you’ve been in your planning and paperwork. Waits of up to 2 months aren’t unusual, but a strong, well supported claim will normally be processed much faster than a sloppy one.
Can I claim again?
Absolutely – and you definitely should! R&D is an ongoing process, so most businesses with qualifying projects end up claiming yearly. Obviously, your costs, innovations and obstacles will change over time, so you can’t just keep submitting the same claim in the same words.
Depending on what you’re working on, your projects might span several years, changing and growing along with your business. On the other hand, agile, fast-moving businesses might find themselves taking on new and exciting projects all the time. Either way, you’ll be glad you embedded an awareness of R&D right at the heart of your firm when it comes to making the most of your innovation.
DIY vs. professional help
If it sounds like it takes a lot of work to make a full, worthwhile R&D Tax Credits claim, then congratulations – you’ve been paying attention. More than just the work, though, it takes real expertise to get the very best out of the scheme. That’s why so many businesses look to the professionals to get their claims sorted.
The R&D rules are full of twists and turns, and a wrong step can lead to your claim falling apart (or worse). Additionally, those rules are subject to change, leading to missed opportunities at best and full-on enquiries at worst. The right kind of help from the start can make the whole process smoother, less stressful and a lot more rewarding. Tracking down costs, crunching numbers and writing solid technical narratives all take expertise to pull off properly.
As with anything else to do with HMRC and tax, if you’re not sure exactly where you stand, your best bet is to talk to a specialist.