All companies liable to UK corporation tax may be eligible to claim R&D tax relief.
From software development to manufacturing. Rocket science to construction. Food and drink to engineering. R&D is present in most sectors.
Broadly speaking, if your company is working on developing new products, processes or systems, it is likely to qualify.
There are two schemes that companies can claim under:
In simple terms, you are an SME if you have:
- Staff headcount of less than 500; and
- Turnover of no more than €100M, or, Balance Sheet assets of no more than €86M.
There are complexities surrounding groups and transitional years.
HMRC has identified incorrect assessment of SME status as one of the most common errors within R&D claims. We strongly recommend seeking professional and experienced advice if your company’s SME status is in any way unclear.
Any eligible company not fitting the definition of an SME will need to claim under the RDEC scheme. In some circumstances, SMEs that have received grant income, or, have undertaken subcontracted R&D will also need to claim under the RDEC scheme.
The definition of R&D for tax purpose is set out in a Government document, known as the BIS Guidelines.
In simple terms, R&D takes place when:
- a project seeks to achieve an advance in science or technology, and
- the project attempts to resolve scientific and/or technological uncertainty.
If your company is undertaking any projects that are using science or technology in new or unusual ways, or, if you are unsure how to achieve the aims of the project(s) at the outset, you are likely to be undertaking R&D.
Unsuccessful projects can also qualify for R&D tax relief.
The main types of qualifying R&D expenditure are:
- Staff costs (salaries, employer’s NIC, employer pension contributions and reimbursed expenses).
- Externally provided worker (e.g. agency staff) costs.
- Subcontractor costs.
- Software costs.
- Materials and consumables.
Tax legislation clearly defines qualifying expenditure. However, there is still some ambiguity over how best to link the qualifying expenditure to the qualifying activities. This requires a clear, logical and data driven methodology.
The same methodology is not appropriate for all companies.