Research and Development tax credit – the highest gross margin project you’ll undertake?

There’s a common misconception that your company has to be involved in rocket science to be eligible for Research and Development (R&D) tax credit. The criteria to be able to make a claim under the legislation are actually much more forgiving. To get R&D relief, you need to explain how a project:

• looked for an advance in science and technology
• had to overcome uncertainty
• tried to overcome this uncertainty
• the uncertainty could not be easily worked out by a competent professional in the field

The spectrum of qualifying projects can be vast. For example, I’ve been involved in R&D claims ranging from high-end performance cars, to car door hinges, crop trials and construction projects. These are just a few examples of the many different areas R&D can be found in. Few people realise that so many industries and activities can be subject to R&D tax relief.

I challenge you to think about the work your company does and if the above four bullet points can be ticked for any work you’re doing. It’s surprising how many companies are able to make an R&D claim, and more surprising how many haven’t identified it yet. It’s also worth noting that the projects don’t actually have to succeed to be eligible for the credit – it’s the participation not the winning that counts!

A stumbling block for some is that they think they may have a qualifying project, but they feel the costs are minimal and it’s not worth the time to look into. However, the scope of costs that can be claimed for R&D relief are much wider than you think, and it can be so lucrative that it’s definitely worth exploring. The most significant (but not exhaustive) costs that can be claimed for R&D are:

• salaries
• wages
• Class 1 National Insurance contributions
• pension fund contributions
• consumables
• software

R&D claims are calculated differently for companies that are small and medium sized enterprises (SMEs) and those that are larger, which make Research and Development Expenditure Credit (RDEC) claims.

SMEs are companies/groups with:

• less than 500 staff
• a turnover of under 100 million euros or a balance sheet total under 86 million euros

R&D relief allows SMEs to deduct an additional 130% of the R&D costs from trading profits to arrive at taxable profits.

By way of example, an SME has made an accounting profit of £500k after deducting expenditure of £100k on qualifying R&D projects. To calculate the taxable profit (ignoring all other tax adjustments), a further £130k would be deducted. This results in a taxable profit of £370k. The tax saving on this at the current rate of 19% would therefore be the £19k on the original expenditure (in line with all allowable expenditure), plus an additional £24,700.

If a company doesn’t have taxable profits to be able to utilise the additional deduction, it can be surrendered for a credit of 14.5%. This can be particularly helpful for start-up companies that may not yet be profit making and could benefit from a cash boost rather than carrying forward a tax loss.

As you can see, the potential tax savings are significant; probably the highest gross margin project you will undertake. While this may sound ambitious, R&D claims often take just one or two days of management time to prepare, in additional to comparably small accounting fees. On an R&D claim of the size above (which is reasonably modest), you could be looking at an 80% profit margin.

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