R&D tax credit criteria: Which companies can submit a claim?

The government offers generous tax credits to help incentivise companies who are doing research and development.

However, with the research and development tax credit, there are some criteria that must be met before an organisation can submit a claim.

The latest in our series of blogs on research and development tax credits focuses in on which companies can submit a claim. 

In this blog post, Anne Rose, Head of Tax at Burgis & Bullock, runs through the criteria, what can be claimed, how to claim and more.

Who can claim the R&D tax credit?

If you own a business it is important to stay up-to-date on all of the available tax credits that can help reduce your tax bill.

Fundamentally, all companies can claim R&D tax credits, provided they qualify under the criteria set by HMRC.

But ‘company’ is the key word. The business cannot be a sole trader or a partnership. As long as the business is a company that is doing innovative work and it fits under the qualifying criteria, the business will be able to claim R&D tax credits.

Don’t forget, the three primary qualifying criteria:

  1. Must be performing qualifying research and development activities.
  2. Qualifying research is defined as an activity that has the potential to contribute to increasing industry knowledge about a technological advance.
  3. This includes any process involving experimentation, exploration, creation or invention where there is no certainty whether any results will be achieved.

There are two schemes to claim under, the SME scheme and large scheme. The SME scheme is by far the more generous of the two schemes, but does require you to stay below certain criteria.

This includes having less than 500 employees or turnover under 100 million euros.

For many small and medium sized businesses, this won’t be an issue. However, where we have seen problems is when companies merge or are sold to a larger corporate group.

The business will then be judged as part of this wider financial group and it may result in being unable to capitalise on the generous SME scheme.

This is certainly something to consider for business owners considering selling to a large PLC, as it could result in a significant reduction in the tax relief available for research and development.

A loss-making business CAN still claim an R&D tax credit – and one option is to convert the loss by claiming R&D into cash back credit.

But the Government won’t give money to a business that is not a going concern at the time any cash is being repaid ie they will not support a business in this way if it is on the verge of bankruptcy.

When can you submit an R&D claim?

It’s important to note that you can only start to claim when the business has incurred qualifying costs!

You won’t be able to claim for R&D that resulted from that first ‘eureka’ moment. HMRC will allow you to claim once you had assessed your goals, your path to achieving those goals and any obstacles that might be presented during that process.

From there on you can claim R&D tax credits right up until you have achieved your technical goal – but the claim must stop prior to the production stage.

The people working in businesses must also be paying themselves a salary, as without that there is nothing to claim on!

You can submit a claim at any point within two years of the end of the accounting period on which you wish to claim. Two years is the absolute final cut off point.

The claim can only be submitted with the regular, annual corporation tax return, as it ties into that process with HMRC.

To find out how Burgis & Bullock’s specialist tax team can support with R&D tax relief claims, visit www.burgisbullock.com or call 01926 451 000.

What can be claimed as R&D?

In general, to be eligible for the R&D tax credit, a company needs to have incurred research and development expenses as part of its qualified business activities.

Technology companies, pharmaceutical companies, engineering businesses and manufacturers are the most common types of businesses that meet this criteria.  However, the relief is in no sense restricted to those types of company activities.  Any business seeking to make an advance in technical knowledge can claim.

The type of work that must be done is highly specific to each company.

For example, a pharmaceutical company might be required to test new drugs or treatments in its research and development efforts while a technology company might be required to design new products or develop new software.

There are four key areas of expenditure which will qualify for R&D tax relief if incurred in respect of a qualifying R&D project:

These are:

  1. Staff and people costs – this is the cost of employee time which can be directly related to research and development projects, but in some limited cases for those performing indirect qualifying activities too.
  2. External consultant or sub-contractor costs – these are costs incurred directly by the company and would cover consultant and sub-contractor expenses on the research and development activity.
  3. Consumables – you can claim back for expenses on consumables that are used as part of your activity, this could include things like materials, heat, light and power.
  4. Software costs – businesses can claim for using third-party software during the research and development process. This allows businesses to test different software to see which will help to achieve the project’s goals.

For more details on what expenditure qualifies in a claim read our dedicated blog on the subject.

How do I claim a research and development tax credit?

For the majority of businesses, it is recommended business owners seek professional support on the research and development tax credit claims.

From the first conversation with a professional adviser, they should be able to identify whether the business is likely to have a successful claim. This experience can be very beneficial and make the process very smooth.

However, for smaller businesses who may not need professional support, a system has been created named Advance Assurance.

As part of Advance Assurance, the business will have to fill out forms describing their activity and then HMRC will get in touch to discuss. From there, HRMC will write to advise if the business would qualify for the tax relief.

If you are considering claiming yourself, you will need to be prepared to answer questions directly from HMRC.

Remember these two key points:

  • Understand if your activity qualifies
  • If yes, then you need to know how to pull together appropriate documentation to send to HMRC.

For more details on how to claim and expert guidance, read our dedicated blog here.

Read our series of blog posts on R&D tax credits below:

To find out how Burgis & Bullock’s specialist tax team can support with R&D tax relief claims, visit www.burgisbullock.com or call 01926 451 000.

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