R&D tax relief is an incentive regime, first introduced into the UK in 2000, that helps companies fund their product/service development and enhancement programmes. It can deliver significant reductions in corporation tax or even a payment from HMRC where there is insufficient tax liability.

An absolutely fundamental point to understand is that “R&D” for these purposes is a broad definition; it is most definitely not just limited to scientists in laboratories!

If you can answer ‘yes’ to any of these questions then you are most likely undertaking qualifying R&D.

  • Do you undertake projects to develop, create or enhance your products, processes or services?
  • Do you have to overcome technological problems to succeed in these projects?
  • Do you employ technologists to solve those technological problems?

What is it worth?

An SME with £500,000 of qualifying expenditure would see a reduction in their corporation tax bill of £130,000. If they were currently in a tax loss situation, they would receive a payment from HMRC of £166,750.

For a large company with £5m of qualifying expenditure, there would be a tax saving of £440,000 or, if the company was in a tax loss situation, a payment from HMRC of £440,000.

What sort of activity is “R&D”?

In short, anything where you are seeking to advance knowledge or capability in an area of technology is likely to be “R&D”. If you are trying to overcome technological risk and uncertainty then it is likely that you are undertaking “R&D” for these purposes.

What is “eligible expenditure”?

There are six categories of potentially eligible expenditure in the legislation. The first five are available to companies of any size – although the detailed subcontract rules are quite different for SMEs and large companies – with the last one only relevant to large companies.

The categories are:

  • Staff costs
  • Externally Provided Workers (EPW)
  • Expenditure on software or consumable items (this specifically includes relevant light, heat & power costs)
  • Payments to the subjects of a clinical trial
  • Payments to a subcontractor in respect of R&D work (in some situations)
  • Contributions to independent R&D (large companies only)

How is R&D relief claimed?

The first point to emphasise is that R&D relief does have to be claimed – it isn’t given automatically.

Strictly, the company need only include the relevant numbers in its Corporation Tax Return (CT600). In practice, however, HMRC will need much more information in order to review any claim. Rather than wait to be asked – which is much more likely if no information at all is provided – it is better to provide that information upfront in a properly prepared claim report. Given that, the basic information needed is as follows.

  • Description of the qualifying activities, explaining the advances sought and uncertainties overcome.
  • Breakdown of the relevant eligible costs, showing how these have been arrived at.

What are some of the most common mistakes?

Some of the more common mistakes that are seen in R&D claims – by HMRC and by me when I am reviewing claims prepared by others – are:

  • Project activities outside the scope of R&D for tax purposes are included in the claim. Regrettably, this seems to be on the increase. Make sure your claim preparer really understands the definition of R&D.
  • Equally, I regularly see – in claims prepared in house or by other advisers – potentially qualifying activities omitted from the claim. It is absolutely essential to fully understand the definition of R&D in order to be able to effectively overlay that onto the company’s activities and optimise the value of the claim.
  • Expenditure outside the qualifying categories is claimed. It is not unusual, in my experience, to see claims made in respect of (for example) overheads that do not qualify as consumable items or consumable stores. One company was even told, “the legislation doesn’t say that overheads can’t be claimed, so you should claim them.” Unfortunately, that’s not the way the legislation works – as any competent R&D adviser would know.
  • No account is taken of subsidies or Notified State Aid for SMEs. These can have a significant impact on claims by SMEs and it is important to fully understand the nature of any subsidy or grant.

What should I be doing?

If you think that you may be undertaking R&D activities – and especially if you have answered ‘yes’ to any of the questions in the first section of this note – then you should be claiming R&D relief. Contact me for a no-obligation discussion of how we can work together to ensure you get the best value from your R&D activity.

With me you get a personal – rather than a production line – approach to your claim. I have almost 29 years experience in Tax, over 10 of those as a partner at KPMG and more than 16 years experience of R&D tax relief.

All of that experience is available at a fair, value for money price.