A group of boffins try to get their heads around the UK’s R&D tax credit system. Image from Flickr (Steve Jurvetson/jurvetson)

A report in Business Matters suggests that around 40% of companies that might be eligible for R&D tax credits do not apply for them. This supposedly equates to an average refund of £35,000 per year (tax free) that is not being claimed. In this article IPcopy takes a brief look at the subject and asks what are R&D tax credits, can I claim them and how do I go about this?

What is the scheme?

The Research and Development tax credit system in the UK is an incentive to encourage investment in R&D by all types of company (SME and large entity). The tax credit can take the form of a reduction in a company’s tax bill or a claim for payable cash credits as a proportion of the company’s R&D expenditure.

Are you eligible?

Whereas the UK Patent Box system can help reduce a company’s corporation tax after an invention has been developed and a granted patent secured, the R&D tax credit system enables companies to deduct up to 225% of qualifying  R&D expenditure when calculating profits for tax purposes.

It is not necessary for companies to have a “Q” branch staffed my hundreds of people in white coats working on cutting edge research in order to qualify for the system. The basic requirements are that a company can only claim for R&D relief if an R&D project seeks to “achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.” Furthermore, the project must be related to your company or organisation’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.

What type of industry sectors can claim?

Claims from companies in disciplines such as insurance and healthcare as well as from companies operating in the engineering and software fields have in the past been successful.

According to a recent report from HMRC claims have been received from industries such as: business services, manufacturing, mining & quarrying, construction, transport, education and agriculture and fishing. In the year 2011-2012 there were 12,190 claims which represented £1.2 billion of tax relief.

How to claim?

The process of submitting a claim involves assessing qualifying R&D activity, calculating the qualifying R&D expenditure and then submitting the figures in a return. It is recommended to keep good record-keeping of all eligible activities and costs in order to form an audit trail in the event of a subsequent enquiry.

It is possible for a company to submit a claim themselves, however many tax firms and specialist firms can assist what can be a fairly complicated process. For more information on the R&D tax credit system contact your legal or tax advisers for assistance.

More information – Research and Development (R&D) Relief for Corporation Tax (HMRC)

Mark Richardson  25 September 2013

Blog image downloaded from Flickr under a creative commons licence (Jurvetson)