The Year 2000 saw the introduction of Research and Development (R&D) Tax Credits. The scheme is designed to encourage greater spending in R&D, leading to innovation.
By 2018 up to 55% of small businesses still didn’t know what they could claim. Estimates up to £74bn are what hasn’t been claimed!
To ensure that you know what you can and cannot claim for, let’s look at what you are doing that you can claim for and what expenses can be claimed…
What are you working on?
The general rule is that what you are developing does not currently exist. As part of the assessment of any R&D tax credit claim, there will be an expectation that you have done your research and can be sure that there isn’t something already out there. If there is, chances are your claim won’t go through. So let’s look at the four key areas you can claim for:
1. Solving a technical problem.
2. Developing new processes
3. Developing new or updated products
4. Software development
What can you claim?
The biggest expense in any claim is likely to be manpower. Keep track of all the time your team spends on an R&D project as this can all be claimed for. Make sure you keep your timesheets, so that you can prove what time was spent on what project.
If there are skills you need that you don’t have within the business, you sub-contract to companies such as Ignys. What you can and cannot claim for sub-contract expenditure varies, depending on what scheme you are claiming under (more on that later).
Advice from Ian Davie, at TBAT Innovation, is that you can claim 65% of the costs of R&D work Ignys does for you.
Keep records to show what work subcontractors have done and the costs involved.
Software costs can easily mount up within and R&D project. If you need to buy, or subscribe to, specific software products as part of the R&D process, such as Altium or CAD products, these costs can be included in the claim. If, however, this is software you use normally within the business, you may be able to claim a proportion of those costs.
Unless you are developing software, you are going to be using materials within prototypes. Components, consumables,PCBs,plastics and metals will be used in developing your prototype products. We could go on quite a bit with a list, but you get the point. Of course, we will keep records of all materials we use for your R&D project, so they can be included in your claims. These can be broken out from the sub-contract costs, as these can be included into your claim at a different rates.
Finally, don’t forget that you can claim for all the costs throughout the research and development journey. It’s rare that someone gets it right first time; you’re expected to fail along the path to success. If it was easy, chances are someone else would have already done it!
What scheme is the right one for you?
There are two schemes
1. The SME Scheme: for companies of less than 500 staff and less than Euros100m turnover
- a. A 130% uplift is applied to your R&D costs leading to a tax reduction of £25 for each £100 spent on R&D if you make a profit
- b. Loss making? you could receive a cash payment of £33 for each £100 of R&D expenditure
- c. Claims can go back two full years resulting in a repayment of corporation tax already paid
2. The RDEC Scheme: for companies that don’t qualify for the SME scheme and for grant funded projects (see more later)
- a. No minimum R&D Spend
- b. No upper limit on claims
- c. aA benefit of £9.70 per £100 on R&D
- d. Repayable credit now possible for large companies
What about grant funding?
If you have been awarded grant funding to help you with an R&D project, things get a little more complicated. Even if your company would normally qualify for the SME scheme, you must claim under the RDEC scheme.
It then gets a little more complicated and it depends on who takes the risk, who owns the IP and who controls the project. Depending whether you asked Ignys to conduct the R&D project could affect what each party is able to claim under the R&D tax credits.
What does that mean about your work with Ignys?
What this means is that the work we do to help you with your electronic product development becomes significantly cheaper. A £50,000 project with Ignys, assuming the claim goes through, can get you a £6,126 tax refund or cash payment. Let’s quickly show you the maths:
Project Cost: £50,000
Claimable Value: £32,500 (65%)
R&D Tax Credit: £8,027 (16% of project cost)
The purpose of this article is to ensure you know about R&D Tax Credits and, also, to show how they can help to fund part of any projects you ask Ignys to work with you on. If you want to have further discussions about a development project, give us a call.