If you are an innovative business then there could be potential for you making a claim for research and development (R&D) tax relief. Many businesses are unware that R&D tax relief is available to them or they incorrectly dismissed it as not applying to them.
What is R&D
The former Department for Business, Innovation & Skills defined research and development as:
‘Research and development takes place when a project seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty.’
The definition is purposefully broad so as to encompass all sectors and all possible types of innovation. All of the following activities could qualify for R&D for tax purposes:
- New product, process or service development
- Changes or modifications to an existing product, process or service
- Internal projects
- Unsuccessful projects
Market research does not qualify as R&D for tax purposes.
The tax relief on allowable R&D costs is 230%. This means that for every £100 of qualifying costs, your company could reduce your taxable profits by an additional £130 on top of the £100 actually spent.
If the company has made a loss then this can exchanged for money actually paid by HMRC. This is optional. The money paid will be at a reduced rate of 14.5% (compared to normal loss relief of 19%), which will be paid to the company.
Qualify for Research and Development
The company incurring the research and development must be a going concern and the research needs to be relating to the business you are in or intend to be in.
When thinking about research and development, it is necessary for there to be an intention to achieve an advance in overall knowledge or capability, within the field of science or technology resulting in the resolution of scientific or technological uncertainty. This could be a project which seeks to create a new process, material, device, product or service or make an appreciable improvement to an existing one or fundamentally change the effect of the process, material, device, produce or service.
Science does not include work in the arts, humanities and social sciences (including economics).
Having said all this, it is important to keep to broad mind when considering activities that may qualify for R&D as this case study demonstrates.
CASE STUDY – Dartington Crystal are one of the world’s leading glassware producers. They undertake bespoke commissions such as prestigious trophy replicas and high-end whisky bottles. Such projects require extensive research and development and it is only after comprehensive experiments with moulds and compound materials that the finish product can be achieved. They have been able to take advantage of the R&D tax relief available on these projects, which have in turn help to fund future projects.
Making the claim
We recommend that you speak to a specialist in R&D tax if you think that your business could qualify for R&D tax relief. They should be able to provide the technical context and understanding needed to maximise any claim. They will know what is allowable and the questions to ask to unearth R&D qualifying expenditure you may to have been aware of. Some offer a no win no fee arrangement, but be aware to fully understand what their fee will be before agreeing to such an arrangement as they can sometimes end up taking a significant proportion of the amount you are entitled to.