Sometimes HMRC give more than they take!

The government are keen to make the UK the go-to place for innovation and investment, so they're encouraging companies to develop new and exciting products, systems, software and services. That's where HMRC's Research and Development (R&D) tax relief comes in.

If you're working on innovative developments in science and technology you may be able to offset your R&D costs against Corporation Tax – and claim considerably more than you actually spend.

The current calculation is that for every £1 you spend on R&D you can claim £2.30 in tax relief, if you are a small company. However, you must submit an application and satisfy HMRC that your project meets all the right criteria. These include providing an explanation of how your product will:

  • Provide an advance in science and technology
  • Show that there is uncertainty about the technological possibility
  • Demonstrate that it will overcome the uncertainty
  • Be something that could not easily be worked out by a professional in the field.

Who qualifies?

  • R&D relief is aimed at SMEs and the HMRC version for R&D purposes of what constitutes an SME is:
  • Fewer than 500 staff
  • A turnover of less than 100 million euros or a balance sheet of less than 86 million euros.

If your company is making a loss – as is often the case during the development phase, you can still claim a tax credit worth up to 14.5% of the loss generated by the R&D expenditure.

It's surprising what comes under R&D relief and it's definitely worth consulting with your accountant or an expert in this field before submitting your claim. HMRC still report that this is an area where businesses underclaim which is surprising considering the benefits.

Footnote:

Corporation Tax rates will increase for companies earning more than £50K in net profits next April. Profits under £50K will still be taxed at 19%, but once your profits exceed £50K your tax rate for anything exceeding that will, effectively be 26.2% up to profits of £250K, when the whole amount will be taxed at 25%. Check out this blog for more information.