eBook for R&D tax credits

R&D Tax credits

Everything you need to know

A Step-by-Step Guide Learn how to capitalise on the R&D Tax Credit Initiative to boost your financials and fuel innovations.

Table of Contents 01

Introducing R&D tax credits

02

Eligibility for R&D tax credits

03

Qualifying projects for R&D tax credits

04

Qualifying expenditures

05

The schemes for R&D tax credits

06

Applying for R&D tax credits

07

R&D claim process

08

Our Success Stories

09

Frequently Asked Questions (FAQs)

10

Contact Alexander Clifford

R&D Tax Credits

at a glance

What are R&D tax credits?

The R&D tax credits serve as governmental incentives formulated to foster and facilitate R&D activities carried out by businesses operating within the UK. The initiative by the UK government was first introduced in 2000 to encourage small and medium-sized companies to invest more in R&D activities. A separate scheme known as the Research and Development Expenditure Credit (RDEC) was introduced in 2002 for large companies. This opens the window for businesses to stretch the scope of their R&D endeavours and enhance operations to fuel growth, all while alleviating concerns about R&D expenditures.

How do tax credits work?

You can apply for R&D tax credits to claim cash refunds from HMRC or enjoy corporation tax reductions on qualifying R&D expenditures if your business is engaged in: The development of new or improved products, processes, services or even the advancement of existing ones Overcoming technical challenges or uncertainties to achieve scientific advancements Systematic investigation or experimentation throughout the process The dynamics of these activities may vary based on the industries considering the broad horizons of R&D.

What counts as R&D? The qualifying activities for R&D vary across industries, considering the broad scope of possibilities in their respective field. In order to ascertain eligibility for R&D tax credits, companies need to follow a four-criteria model, commonly referred to as the four-part test. This model offers a more precise perspective and helps determine whether a company qualifies for the tax credits.

The Four Criteria For R&D Tax Credits

01

PERMITTED PURPOSE The R&D activities conducted with the aim of enhancing the performance, reliability, quality and functionality of a product or software.

TECHNOLOGICAL UNCERTANITY

02

The unpredictable results that may arise during the development of a product or software, including the associated processes.

PROCESS OF EXPERIMENTATION

03

04

The need for a trial-and-error phase with the intention to overcome technological uncertainties.

TECHNOLOGICAL IN NATURE The R&D activities must fall within the domains of engineering, physical sciences, biological sciences, or computer science.

Simply put, if your business is involved in developing new or improved products, processes, services, or advancements, overcoming technical challenges, and conducting systematic investigation or experimentation within technological fields, you may be eligible to apply for R&D tax credits.

Eligibility checklist for R&D tax credits The checklist is designed to evaluate your eligibility for claiming R&D tax relief. As you read each question, simply choose "yes" if you agree or "No" if you disagree with the statement.

YES / NO

01

Has the company engaged in any qualifying projects over the past two years?

Did you identify any technical uncertainties at the

02

beginning of the project that, if resolved, would result in a significant scientific or technological advancement

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

within the market?

Does the project require knowledge or expertise that is

commonly available, and necessitate a solution 03 not that can only be derived by specialist(s) working on the project?

Are the eligible costs inclusive of expenses related to

agency, subcontractors, software licenses, and 04 staff, consumables, excluding dividend payments associated with the company?

05

Are these costs reflected in the company's Profit and Loss account? Claiming R&D tax relief on fixed assets is not possible, but under exceptional cases, there is a possibility to reclaim R&D tax relief on specific intangible assets.

06

Do you have the necessary documentation to support your R&D tax credit claim? This may include technical & financial reports, project plans, technical specifications, research notes, testing records, and other relevant documentation.

These questions are not exhaustive and only outline a brief overview of eligibility criteria. You may require additional checks to be fulfilled, depending on the scope of the project or qualifying activities.

What are the types of qualifying projects for R&D tax relief?

It is imperative to understand which activities or projects can involve businesses in R&D endeavours to capitalise on R&D tax relief. If the technical team faces challenges in overcoming technical obstacles, finding solutions, or harbouring concerns about technical uncertainties, the project probably qualifies for R&D tax credits.

Here are a few examples of qualifying projects

Products & Process Processes reengineering to enhance efficiency in operations Designing and developing new innovative products Designing cost-effective and innovative operational processes Designing, developing, and testing product prototypes Development of improved or efficient products Advanced product development using computer-aided design (CAD) tools Development of unique computer numerical control programs and programmable logic controllers Designing and development of innovative manufacturing equipment Prototyping and three-dimensional solid modelling New techniques or integration of new materials to improve product performance and manufacturing processes

Software Tailored software or applications to run new computer hardware Tailored software to run on devices with pre-installed operating systems, such as GPS, mobile phones, and tablets New or advanced methods of capturing, transmitting, manipulating, and protecting data Software or applications to cater needs of new projects Tools to extend the functionality of application software programs or of an operating system Extensions to database software, programming languages, or operating systems Software development tools, such as data across platforms, image processing or character recognition Advanced data management techniques, such as new object representations and new data structures

" Due to the distinct dynamics within each industry, projects can exhibit variations depending on the specific nature and scope of the work involved. "

What are the qualifying R&D expenditures?

Carrying out R&D activities is evidently associated with expenses also known as Qualified Research Expenses (QREs) that companies incur in order to achieve innovations. Most of these costs fall under the category of R&D expenditures, which include staff PAYE costs/pension contributions, subcontractors’ costs, consumables, software purchases, travel costs, and utility bills.

What costs don’t qualify for R&D tax relief?

R&D tax credits are specifically intended to assist companies engaged in trial and error for innovations and advancements. This implies that expenses related to the production, distribution, or creation of goods and services resulting from R&D work cannot be claimed. Additionally, expenses such as rent, land, and patent creation are also ineligible for claiming.

Who can claim R&D tax credits?

The legislation governing R&D tax credits has intentionally cast a wide net, encompassing diverse sectors such as Information Technology (IT), construction, manufacturing, renewable energy, engineering, and more. Its broad spectrum ensures that innovation across various industries can qualify for these credits. In order to be eligible for the R&D tax credits, you must: Be any type of company, other than limited liability partnerships (LLPs) in the UK that is subject to Corporation Tax Have carried out qualifying R&D activities Have spent money on these projects in the UK It’s important to note that even unfinished or abandoned projects that meet the criteria can still be eligible for claiming R&D tax credits.

Don’t let them go to waste — they could still be the source of your financial stability and future prospects of growth.

Who qualifies for R&D tax credits?

R&D is fueling innovation and growth in almost all industries: Information Technology (IT) drives advancements in emerging technologies, manufacturing focuses on cost-effective operations, construction adopts advanced safety measures, renewable energy seeks sustainability, engineering delivers reengineered solutions, making it applicable to these sectors and many more.

Which R&D tax credit scheme is right for me?

The initiative covers two schemes for claiming R&D tax credits and the given rates apply to accounting periods beginning on or after 1st April 2023.

SME Scheme

RDEC Scheme

The SME scheme is designed for small and medium size companies with less than 500 staff, a turnover under

The Research and Development Expenditure Credit (RDEC) scheme is utilised by larger companies with staff

€100m, and a balance sheet total under €86m.

headcount over 500, a turnover of €100m or more, and a balance sheet total of €86m or more.

What are the rates of R&D tax credit schemes? ” The rates of R&D tax credits heavily depend on the specific R&D scheme and the context of your company. ” SMEs trading at a profit or loss can calculate their entitlement based on the R&D enhancement. The R&D enhancement is calculated at 86% of the qualifying expenditure which is then added back onto the qualifying expenditure to give you the enhanced expenditure (186%).

Entitlement Payable - If the normal taxable profit/trading loss is lower than the R&D enhancement, it leads to a trading loss after R&D. In this case, the surrenderable loss will be a loss after trading relief, and the entitlement payable will be calculated at 10% of this amount.

Corporation Tax Refund - If the normal taxable profit/trading loss exceeds the R&D enhancement, it leads to a trading profit after R&D with no surrenderable loss. In this case, the entitlement payable will be calculated at the Corporation Tax rate of 25% of the R&D enhancement. This can result in a Corporation Tax reduction or refund if the tax has already been paid.

Large companies can receive a tax credit of 20% on their qualifying R&D expenditure under the RDEC scheme.

These rates are subject to change based on the ever-evolving legislation by the Government, so it’s advisable to consult with R&D tax credit specialists for the most up-to-date information on R&D Schemes.

Example of a profit-making SME The rate of R&D tax credits for profit-making SMEs translates to a benefit of up to 25% on their R&D expenditure.

Description

Amount (£)

Company Revenue

9 0 0 ,0 0 0

Company Costs

5 0 0 ,0 0 0

Pre-tax Profit

4 0 0 ,0 0 0

Corporation Tax (25%)

100,000

R&D eligible costs

3 0 0 ,0 0 0

R&D Allowance (86%)

2 5 8 ,0 0 0

Enhanced R&D Expenditure (186%)

5 5 8 ,0 0 0

Reduced Pre-tax Profit (£400K - £258K)

1 4 2 ,0 0 0

Reduced Corporation Tax (25%)

3 5 ,5 0 0

Corporation Tax Saving

64,500

Example of a loss-making SME Loss-making SMEs have the option to surrender either the lower amount between the enhanced R&D relief or the taxable losses incurred during the period. By surrendering these losses, the company can receive a cash credit in the form of a tax credit payable, currently set at a rate of 10%.

Description

Amount (£)

Company Revenue

4 0 0 ,0 0 0

Company Costs

5 0 0 ,0 0 0

Pre-tax Loss

( 1 0 0 ,0 0 0 )

R&D Eligible Costs

3 0 0 ,0 0 0

R&D Additional Relief (86%)

2 5 8 ,0 0 0

Enhanced R&D Expenditure (186%)

5 5 8 ,0 0 0

Increased Pre-tax Loss (£100K + £258K)

( 3 5 8 ,0 0 0 )

R&D Tax Credit Payable

35,800

Lower of enhanced R&D expenditure or trading loss (after including additional R&D tax relief) x 10%

11.93% of R&D eligible costs

Calculate your estimated R&D tax credits now

How to apply for R&D tax credits?

Successfully filing an R&D tax credit claim requires meticulous efforts to consolidate all the necessary information demanded by HMRC, aiming to maximise the potential outcomes. Below are a few key steps that, when followed accurately, can facilitate the submission of an R&D claim application.

CHOOSING THE PROJECT To begin, you need to determine the specific projects for which you will be making claims. Each project must adhere to HMRC's criteria in order to qualify for R&D tax credits.

DECIDING THE RIGHT SCHEME You need to determine whether you fall under the SME or RDEC scheme by analysing factors such as the size and financial situation of your business, along with other relevant considerations.

ESTIMATION OF YOUR CLAIM SIZE You need to calculate the aggregate of the eligible costs and qualifying expenditures accumulated by the projects included in your claim. This calculation will provide you with an estimation of your R&D tax credits.

WRITING THE TECHNICAL NARRATIVE A technical narrative is a summary of your project's scope and development, typically spanning two to five pages. It highlights any uncertainties or challenges encountered during the work. It is optional but provides an opportunity for you to explain your work to HMRC, adding value to your R&D claim.

COMPLETING CT600/CT600L It is now time to complete your Corporation Tax form, also known as CT600/CT600L. Your financial calculations must be included in this form.

FILING YOUR R&D CLAIM All you need to do now is organise your technical narrative along with the CT600 to submit your claim to HMRC. You can either do it yourself or seek assistance from R&D tax credit specialists. The upside of engaging an R&D claim specialist is to dwindle the chances of HMRC inquiries and maximise the outcome.

HOW CAN WE HELP?

Our R&D Claim Process YOUR AUTHORISATION We'll gain your authorisation via our client instruction form/NDA. This will enable us to discuss your technical activity along with your current tax position.

TECHNICAL SCRUTINY We'll evaluate your Profit & Loss (P&L) statement whilst facilitating your technical call. This will help establish if your case is plausible from a technical and financial perspective.

INFORMATION & DOCUMENTS GATHERING Provided our experts are happy your case will qualify, we will then gather all of the required technical information and financial documentation to support your case.

IN-HOUSE COMPLIANCE At this stage, we'll run your case through a very stringent in-house compliance procedure prior to submitting your reports.

APPLICATION SUBMISSION Your case will be submitted to HMRC.

POTENTIAL OUTCOME Our team stays in constant dialogue with HMRC's offices and uses a very systematic approach to ensure there is a minimal delay with your repayment.

How to calculate R&D tax credits?

There are R&D tax credit calculators available online specifically designed to simplify the complex process of determining your eligible tax credits.

With just a few inputs, these calculators swiftly and accurately evaluate your estimated R&D expenditures and applicable tax incentives. They eliminate the guesswork of how to calculate R&D tax credits by providing precise estimates, helping you apply for R&D claims with confidence and maximising your tax benefits. Try our R&D tax calculator for free.

How far back can you claim R&D tax credits?

You can reclaim your research tax credits for a period of up to two years after the end of your accounting period. It is highly recommended that you include all eligible qualified research expenses (QREs) that were incurred within the period you are claiming prior to the conclusion of the two-year window.

What are the benefits of R&D tax relief?

R&D tax credits in the UK offer significant financial benefits to businesses. The initiative provides a valuable source of funding to support the R&D initiatives for UK-based companies. SMEs can potentially claim a higher tax relief rate than larger companies.

Essentially, R&D tax credits fuel companies’ financial resources, encouraging increased R&D activities across industries and ultimately contributing to the growth of the UK economy.

How can we help maximise your R&D tax credits claim?

Our team of experienced R&D tax credit specialists is well-versed in the everevolving governmental regulations, grants, tax incentives, and funding opportunities available to companies across various industries within the UK. And to ensure you’re always informed and well compensated for your R&D claims, Alexander Clifford is here to provide the support and guidance you need to stay ahead and succeed. We are proficient and versatile in the R&D claim process, boasting a 100% success rate with HMRC. With our best-in-class expertise, we can help you accurately and precisely claim R&D tax credits based on the latest guidelines.

Our Success Stories The team at Alexander Clifford (Ben, Jamie, Josh, Andrew) have been incredibly helpful and professional in guiding us through our R&D tax credit claims. Their knowledge of the rules and process has undoubtedly saved us much time in preparing and submitting our claims.

A pleasure to work with.

As my company had been involved in research for many years I had intended to claim R&D tax credits. However the process looked time consuming and complex. The team at Alexander Clifford patiently and efficiently guided me through, to make a successful and worthwhile claim.

Dealing with Alexander Clifford for my R&D tax credits was a breeze and pleasure from start to finish. Their team are amenable, extremely knowledgeable and professional, and their claim process was very fast and efficient. I would highly recommend them to any company looking to take advantage of the scheme and we're very much looking forward to working with them again in 2023. 5 stars all round.

TESTIMONIALS

Frequently Asked Questions (FAQs) Got questions? We’ve got answers… here, you’ll find frequently asked questions (FAQs) and common concerns for R&D tax credits. We try our best to answer every possible question that you might have.

What is HMRC's role in this process?

What is the difference between an accountant and an R&D tax specialist?

The Government created the research & development legislation as an incentive to encourage businesses that are developing new or appreciably improving existing; products, processes, systems, and materials – anything that contributes to the growth of the economy.

Whenever an application for an R&D claim is submitted, it is sent to the regional departments of HMRC, where it is scrutinized along with the submitted reports. The application is then evaluated to determine whether to approve, query, or reject the claim.

In short, an accountant specialises in managing your accounts, whereas an R&D tax claim specialist is highly knowledgeable and skilled in identifying eligible R&D activities for tax credit purposes and can increase your chances of receiving benefits from your R&D claims.

To elaborate further, assuming you have a qualified accountant, who handles everyday purchases and typically has a wide-ranging workload that includes managing your accounts and addressing general business matters.

By contrast, R&D tax claim specialists focus exclusively on R&D applications, which means they stay up-to-date with new legislation, industry standards, and technological advancements. They pride themselves on their ability to develop technical narratives and financial reports that accurately reflect the rules and regulations established by HMRC’s Consumer Tax Act 2009. As a result, they can support you through the R&D claim application process more efficiently than an accountant.

Are R&D tax credits government aid?

Yes! However, if you have already received a State Aid grant for your project, it’s possible that it could impact your claim. Therefore, it’s advisable to check with your grant provider.

Are there any additional costs & or a minimum fee?

At Alexander Clifford, we understand that you want to invest in a service that will deliver results without breaking the bank. That’s why we’re proud to offer a ‘No Win, No Fee’ basis for all our services.

After successfully identifying an R&D claim, we only charge 25% of your service entitlement, which is lower than the industry average. If we don’t identify an R&D claim, we won’t charge you anything at all. With our ‘No Win, No Fee’ approach, you can rest assured that your application is completely risk-free.

How much R&D tax credits can I claim?

That will completely depend on the situation and context of your company. Please explore other FAQs related to SMEs and Large companies.

Are R&D tax credits rates different for sme and large companies?

The amount you can claim for your R&D activities depends on the size of your company.

You are classed as an SME if you have less than 500 staff, a turnover under €100m, and a balance sheet under €86m.

Profitable SMEs can benefit from an enhanced deduction of 86% on qualifying R&D expenditure, in addition to the standard 100% deduction. This means a total deduction of 186%.

Loss-making SMEs can claim a tax credit worth up to 10% of the surrenderable loss, which can be used to offset against other taxes or received as a cash payment.

Large companies having a staff headcount of over 500, a turnover of €100m or more, and at least €86m or more in gross assets can receive a tax credit of 20% on their qualifying R&D expenditure under the RDEC scheme.

What happens if I make a mistake in my claim?

Can an unsuccessful project qualify for R&D tax credits?

Making errors in your claim can result in an inquiry from HMRC. That's why it is crucial to thoroughly review and double-check your claim before filing.

Inaccurate or inconsistent numbers are significant indicators for HMRC which can raise potential concerns.

A project does not necessarily have to be successful to be eligible for R&D tax credits. According to HMRC guidelines, the project should involve significant challenges, and failure, even after trial and error, can be an indication of the project's ambitious nature.

If you are still in search of further information that has not been addressed here, please refer to our FAQs for more detailed information.

R&D tax credit specialists Who we are We, at Alexander Clifford, have built a strong reputation for our ability to uncover and evaluate innovative companies that stand to benefit significantly from the R&D tax credit initiative. Our team of experienced R&D tax credit specialists is well-versed in the ever-evolving governmental regulations, grants, tax incentives, and funding opportunities available to companies across various industries. By staying abreast of the latest developments, we ensure that our clients gain a competitive edge by capitalising on the R&D tax credit incentive tailored to stimulate growth and innovation. " Our aim is to unlock the potential of your innovative ideas by offering support and guidance to claim the R&D tax credits you deserve. "

0161 457 8101 hello@alexanderclifford.co.uk Clippers House, Clippers Quay Manchester, M50 3XP alexanderclifford.co.uk

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