Hari Sandhu is CEO of R&D tax credit advisors EmpowerRD. He is also a member of HMRC’s Consultative Committee advising the government on changes to the R&D tax credit scheme. Before founding EmpoweRD, Hari was sector lead for government incentives at PwC. While he has extensive knowledge of the scheme, this guide aims to provide an introduction to first-time claimants.
What are R&D Tax Credits?
The research and development tax credit scheme was created to help stimulate innovation amongst UK businesses. Many of the most notable advances of recent years were in part subsidised by governments, not least the Internet Protocol and World Wide Web advances towards the modern internet.
Indeed, research by the government indicates that for every £1 spent on the R&D tax credit scheme, approximately £2 of R&D expenditure is generated in the private sector. So R&D tax relief has been a significant driver of innovation in the UK economy since its inception in 2000.
Who can claim R&D Tax Credits?
R&D tax credits are available to any UK limited company that spends their capital on qualifying research and development projects. An R&D project typically looks to create, modify or improve a product, service or process. If that project involves resolving some technological uncertainty, then it’s an early indicator that it might qualify as R&D. If you’re a tech startup developing a new product then that will likely qualify as R&D activity.
To find more information on what qualifies for R&D you can have a look at the detailed advice published by HMRC or the summary advice in our EmpowerRD resource. However, defining which projects can count as R&D is complex and even debated amongst R&D tax credit advisors. We recommend speaking to a specialist to understand if your activity could qualify. One of our team will be happy to help.
How much can I claim?
The average SME claim in the UK is £53,714. Generally, you’re an SME under HMRC’s definition if you:
- Have less than 500 employees, and
- A turnover of under €100 million or a balance sheet total under €86 million.
As this is an introduction to R&D tax credits we’ll assume you’re an SME. If you’re a large company and think the RDEC scheme is more relevant to you then have a look at the scheme on the UK government’s website & feel free to get in touch with one of our team at EmpowerRD should you wish to understand more.
The amount you can claim as under the SME scheme will depend on your financial position:
- A loss-making SME can claim back up to 33% of the expenditure on the R&D project
- A profit-making SME can claim back up to 25%
- If you’re breaking then you can claim up to 18%
We’ll now look at which costs can qualify for an R&D tax credit claim – that will give you an idea of how much you might be able to claim.
Which costs qualify for R&D tax credits?
Identifying qualifying R&D expenditure can get quite complicated, but the most common qualifying costs fall into these three categories:
The wages and some other costs related to the employees undertaking R&D.
Subcontractors and consultants are often involved with R&D, but you can only claim back part of their expense.
Materials including chemicals, software, building materials, heat, light and power that are used up or transformed by the R&D process.
There are many more costs that could be identified as eligible expenditure. We recommend reading our guide to learn more.
How long does it take to receive the funds from HMRC?
The delivery of the credit depends firstly on your financial position. If you are a loss-making company then the funds will be paid out as a cash payment. If you’re profit-making then the credit will be delivered as a reduction in corporation tax.
HMRC commit to a 28 day SLA to reach a decision on SME R&D tax credit claims. If you’re receiving a credit then your funds will typically be received within a week after the decision is made. If you’re profit-making then your credit will be deducted from your corporation tax calculation.
In reality, it can take significantly longer than 28 days for HMRC to make a decision. The average wait for funds from our SME claimants in 2019 was 47 days.
How to make a claim
There are four main ways to make a claim:
This might be suitable if you have some expertise in-house, or if your claim is small (ie you’re claiming on less than £20,000 of costs). The government publishes a guide on self-filing here.
Your accountant may be able to submit your claim for you. While this may be a cost-effective option if you have a small claim, you should query the expertise of your accountant doing your claim. Commonly we see that accountant-submitted claims have missed various qualifying expenses that could have increased the claim value.
A Traditional R&D Claims Advisor
Traditional R&D Claims Advisors can offer a good level of expertise and service although it comes at a significant cost. Rates for a claim tend to vary between 12-20% of the credit you’ll receive from HMRC. It can also take many months to get the claim submitted.
We’ve updated the process of making an R&D credit claim. At EmpowerRD we employ industry-leading R&D claims advisors and ex-HMRC inspectors to assess your claim and help you identify your costs, while also providing an intelligent online platform to help you to co-ordinate the claim amongst your team. Read about the benefits of using EmpowerRD in our case studies.
Questions to ask when choosing an advisor
When choosing an advisor or accountant for your claim we recommend asking the following questions to ensure that your claim is processed correctly.
How many claims have they processed?
If they haven’t claimed often, then they may miss relevant costs from your claim, or the claim might result in an enquiry from HMRC.
What % of claims have resulted in a claim value reduction from HMRC?
This should be 0%. If they’re making claims that are reduced by HMRC then they’re likely not aware of what’s required and this could adversely affect your claim.
Does their fee also include defending the claim against an HMRC enquiry?
It’s estimated that around 14% of UK claims result in an enquiry. Defending a claim can be a lengthy process, so some providers will charge significant fees for this. You’ll want to factor in the potential for those fees before committing to a claim with the advisor.
How involved will they be in the claim process?
Some advisors or accountants may offer to write the claim on your behalf, but the reality may involve you filling out long questionnaires or writing technical narratives without much support. You should be able to pick up the phone with a responsible advisor whenever you have a question.
Will they share the claim document with you?
Some providers won’t share the claim document. A responsible advisor will always allow for this level of transparency.
Do they lock you into multiple-year contracts?
Similarly, it’s common for advisors to lock you into a multiple-year contract before you’ve compared the market for prices. We recommend avoiding any lock-in contracts as the market for advisors changes quite regularly, and what may seem like a good deal this year may not be next year.
Commonly asked questions about the scheme
How far back can I claim?
You can claim for your current financial period and two previous periods. For example, the deadline for R&D relief relating to the financial year ending March 2019 would be March 2021.
I received a grant, will it affect how much R&D tax credit I can claim?
You can claim if you’re the recipient of a grant, however, it will likely mean that some of your claim will be processed via the less lucrative RDEC scheme. Determining how much tax credit can be claimed through which scheme depends on the nature of the grant, so you should definitely seek advice on this. One of our team will be happy to discuss this with you.
Can I claim even if the R&D project was not successful?
Yes. HMRC recognises that investing in research & development is unpredictable and therefore they do not require that the R&D be successful to make a claim on the R&D costs.
Can I claim for the same project over multiple years’ claims?
Yes, if the same R&D project extends beyond one financial year it is possible to make a claim on the project more than once. Each claim should relate to the costs incurred on that project during the accounting period of the claim, i.e. you cannot claim for the same costs twice.