R&D tax reliefs are a government incentive designed to encourage UK based companies to invest in innovation. Work that advances overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties, may qualify for R&D tax relief.
You can claim certain costs on the project from the date you start working on it until the project is stopped. These costs can include:
- Employee costs
- Subcontractor costs
- Consumable items
- Payments to clinical trials volunteers
- Certain contributions to independent research
- Developing prototypes
If you are an SME, you can in most circumstances deduct an extra 130% of your qualifying costs from your yearly profit, as well as the normal 100% deduction, to make a total 230% deduction from your taxable profits. This means that on qualifying costs of say £10,000, you could claim back £4,370 in corporation tax relief – meaning this piece of innovation has only cost you £5,630!
For larger companies, or companies obtaining grant funding on these costs, there is a separate system of tax credits with the same basic qualifying criteria – contact us for further details if this is of interest.
Why do manufacturers need R&D tax relief?
2020 has been a challenge for manufacturers, but out of adversity comes opportunities and solutions to challenges. Manufacturing businesses have been forced to adapt their ways of working and come up with innovative solutions to remain profitable and competitive in a very uncertain marketplace.
But innovation costs money, and with Covid-19 having a detrimental effect on manufacturing businesses cash flow, R&D tax reliefs are an incentive that manufacturers can greatly benefit from.
The additional funds that R&D tax reliefs can add to a manufacturer's balance sheet allows them to address ever changing consumer needs, industry standards, economic uncertainties and government guidelines for safer working amidst a global pandemic.
How can you claim for R&D tax reliefs?
Firstly, you need to check if your business is eligible. Claims can be made from any sector, but to qualify, you must meet the following criteria:
- Be a limited company in the UK that is subject to Corporation Tax.
- Have carried out qualifying research and development activities.
- Have spent money on these projects.
If you meet the above conditions, R&D tax relief is claimed within your corporation tax return.
What if I haven’t made profits against which to claim tax relief in this period?
It is possible to claim a tax credit by ‘surrendering’ losses for a payment of 14.5% of the losses surrendered. Alternatively you can carry forward the losses to offset against future more profitable periods.
You should consult a professional to establish whether what you are doing qualifies, and to ensure you are maximising your claim. If you’ve been undertaking R&D activities for a while but never claimed for relief, you can backdate your claim up to two years.
(Disclaimer: This article is no substitute for professional advice - Any changes in business ownership or share structure will have tax and legal implications and professional tax and legal advice must be taken)