To reward UK companies for investing in innovation, the UK Government created the research and development (R&D) tax credit incentive. This HMRC R&D tax credit incentive provides a valuable source of cash to businesses that strive towards improving their level of research and development by reducing corporation tax.
When businesses make an R&D claim, ultimately, the tax funds that are reinstated help to improve the cash flow of the business at the end of the company’s financial year.
What is research and development?
Research and development (R&D) refers to any innovative activities that a business undertakes in order to develop new products or services, or alternatively, improve existing ones.
R&D is often the first stage in the development process, helping businesses ensure that any new products/services they bring to the market have the very highest chances of success.
When referring to tax relief, the HMRC states any R&D project should seek to directly contribute to advancing science or technology. This outlines an overall advance in knowledge, information, or capability that resolves a current uncertainty.
What qualifies as R&D expenditure?
There are a number of activities that can be identified as R&D, you can find them here with brief explanations. Examples that can be used for R&D tax credits include:
- Routine analysis – testing to discover potential weaknesses, strengths or opportunities that solve an uncertainty
- Research – discovering the right materials, solutions or requirements for new products or improvements
- New process creation – developing new systems that boost innovation within the field
- Existing process improvements – improving current processes that create an advance in science/technology
- Product creation – developing and testing new products and prototypes to bring to market
- Product improvements – improving current products to create an advance
- Service creation – the creation of new services that complement your existing capabilities
- Service improvements – improving existing capabilities
- Testing – testing and analysing products or services to improve and adapt
- Technological advances – development of technological advances that solve uncertainties within the current field
To qualify for R&D tax credit expenditure, the research and development activity must resolve specific uncertainties within the field that the business operates. To receive a tax exemption from HMRC, the company must be able to demonstrate that these uncertainties have been improved through the new knowledge that has been uncovered during R&D.
HMRC will review the nature of the advance, the problems your company faced, how they were overcome, and why the information to address the initial problem was not readily available prior to the R&D. This should all be considered from the inital stages of your R&D projects.
What costs qualify?
The costs that can be included within your R&D tax relief application include:
- Project management fees – including R&D planning, analysis of results and more
- Staffing costs – the costs involved with staff that are working on the project
- Outsourced/external workers – any workers that belong outside your organisation can still be claimed as costs
- Software – the software costs within the project
- Materials – any costs that surround consumables, new materials, or specific items that are required within the project
- Utilities – the fuel behind the project, including water, gas and electricity bills
In many circumstances, staffing costs are the largest category of qualifying expenditure, including all salaries, bonuses, National Insurance, pension contributions and more. Where individuals have only spent a small segment of time working on R&D activities, the appropriate amount of tax relief can still be claimed. Any expenditure that encircles capital equipment cannot be claimed, including new machinery and tools that have been used within the R&D project.
What industries can apply for R&D tax credits?
Although many are quick to think that research and development only takes place in technological companies, R&D can take place in any sector that is looking to make an advance in science or technology.
Certain industries rely on R&D at much higher rates than others. For example, a pharmaceutical company would be more likely to place resources in R&D than a retail store.
Similarly, a technology company such as Apple would be more involved in R&D than a high-end restaurant. Nonetheless, businesses from all forms of different landscapes can tailor their R&D efforts towards success.
How do R&D tax credits work?
R&D relief claims can be made to reclaim corporation tax for a period of up to two years following the end of the accounting period the R&D relates to. The relief can be claimed by entering enhanced expenditure into the full Company Tax Return form within the CT600.
Once the HMRC has acknowledged and processed the claim, the process is triggered to begin the release of the designated funds back into the company’s business account. The period of time this takes can be influenced by a number of factors, often turning into a lengthy process that requires regular attention.
Buzz makes tax credits flexible!
This R&D tax relief incentive offers valuable cash contributions that businesses from all sectors love. However, it’s the rigid structure of claiming your finances back that can cause confusion. If you have experienced this, you may be well aware. Wh
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Contact a friendly member of our team today if you want to learn more.