Everything you need to know about R&D relief

As we emerge from recession and into a post-lockdown world, innovation is going to be a key driver of economic recovery.

We’ve already seen digital adoption accelerate at a rapid pace throughout 2020, and over the next few years we can expect more companies to build on that with new technological advances.

If your business carries out innovative research and development (R&D) work, you could qualify for tax relief at up to 230% of your costs.

To give yourself the best chance of accessing that relief, it’s important to understand the ins and outs of the scheme.

Who qualifies for R&D relief?

R&D relief is intended to encourage companies to carry out innovative work. This must be scientific or technological, but its scope is far wider than lab-based research. Sectors such as software, media and film can also qualify for relief in certain cases.

To qualify, your work has to be part of a specific project to make an advance in science or technology, and it must relate either to your company’s existing trade, or one you intend to start as a result of the research.

You’ll need to explain how your project looked for an advance in science and technology, was faced with uncertainty and tried to overcome it. This advance can’t be something another professional in the field could easily work out, so you’ll have to show that too.

It’s also important to note this is a type of corporation tax relief, so it’s not available to you if you operate under a sole trader business structure.

How does it work?

There are two main R&D schemes.

The SME R&D relief scheme is available to those with less than 500 staff and a turnover of under €100 million or a balance sheet total under €86 million.

This provides a 130% deduction which works on top of the normal 100%, giving you a deduction of 230% in total. You can also claim a 14.5% tax credit if the company is loss-making.

The research and development expenditure credit (RDEC), meanwhile, can be used by large companies or those that have been subcontracted to do R&D work for a large company.

It’s currently worth 13% of your qualifying R&D expenditure, but previous rates apply. 

How to apply for R&D relief

To claim R&D relief, work out your enhanced expenditure and enter that into your company tax return.

You can then use HMRC’s online service to support your claim, explaining how your project fits the definition of R&D.

This step shouldn’t be overlooked, as the way a claim is supported can make all the difference to whether or not it’s accepted. You can also apply for advance assurance if this is your first R&D claim, which will guarantee your claim’s acceptance as long as it’s in line within what you discuss with HMRC and claimed within your first three accounting periods.

At FMA, we can produce an accurate calculation of your R&D expenditure, as well as guiding you through the application process.

What’s the future for R&D relief?

Change could be coming to the current R&D relief system, with a Government consultation on its effectiveness launched earlier this year, and a particularly damning report released by the Centre for Business Research in May.

The report argued that the scheme had come at a high cost but failed to incentivise enough R&D activity to meet Government targets. 

It’s possible we might hear more in the next Budget, possibly this autumn. Whatever happens, we’ll keep our clients up to date.

We can offer advice and updates on the R&D relief schemes.

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