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What qualifies for R&D tax relief?

What qualifies for R&D tax relief?
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    R&D Tax Relief is a government incentive to encourage businesses and individuals to participate in research and development.

    Research and development (R&D) is defined as any activity undertaken by an enterprise for the purpose of gaining new knowledge. Qualifying R&D activity includes setting up experiments, conducting trials, modelling or prototyping where these result in new scientific or technological advances.

    The cost of carrying out R&D activities can be deducted from your profits before tax is calculated. This means you can reduce your taxable income with the Research and Development tax credits, which might help you save money on your tax bill.

    What is classed as a cost in Research and Development activities?

    R&D tax relief is a financial incentive to help businesses thrive and grow by reducing their tax burden. In the UK, it’s known as the Research and Development Expenditure Credit (RDEC).

    The benefits of R&D Tax Relief can be huge: It gives businesses an opportunity to invest long-term in research and development (R&D), which helps them develop innovative products, processes and services that can compete on an international stage. As such, it’s seen as vital for supporting growth in the UK economy—which is why it’s available to all kinds of organisations across all sectors with eligible activities.

    The following costs may qualify for R&D tax relief:

    • The cost of developing, improving or modifying a product, process or service. This includes the cost of testing prototypes, as well as other related costs such as materials and labour.
    • Capital expenditure incurred in developing, improving or modifying a product, process or service (such as buildings, machinery and equipment).
    • There are certain costs that don’t qualify for R&D tax relief. The following do not qualify:
    • Purchase price of fixed assets where there is no additional development work undertaken on them – unless the asset has been acquired by way of an asset-for-stock exchange transaction with another company that has done qualifying development work on it.
    • Development expenditure that is carried out in order to comply with technical standards set by regulatory bodies (for example safety regulations).
    • Development expenditure on services provided by third parties rather than your own employees. For example, if you commission someone else to carry out research into certain products then this would not qualify – however, if they were working within your premises (or under contract) and using resources that belong to you then this might count towards your total eligible R&D spend.

    Research and development relief eligibility

    Research and development tax relief is a generous scheme that allows businesses to claim back some of the money they have spent on research and development (R&D). The scheme aims to promote innovation by making it more affordable for companies to develop new products or processes. Ergo, if you’re carrying out R&D, there are good chances that your business will also qualify for this tax break.

    However, before we look at what qualifies as ‘research and development activity for the purposes of receiving this benefit, let us explain what does not count:

    • Routine work such as updating existing products with new features or fixing bugs;
    • Activities aimed at improving efficiency or saving costs, such as standardising production processes;

    To claim R&D tax relief, you must have been carrying out qualifying R&D activities for a continuous period of 12 months or more.

    You can claim the following types of expenditure:

    • Research and Development Expenditure – Expenditure incurred on direct costs used in carrying out your business’s planned research and development activities. This includes payments made to contractors, subcontractors and staff involved in your company’s R&D projects;
    • Qualifying Patent Expenditure – Expenditure incurred on patenting costs related to patented products which are being developed as part of an existing project or as part of a new project.

    Does my project qualify for R&D tax relief?

    You can claim a percentage of eligible expenditure on a project as an additional deduction against your corporation tax bill.

    In order for the project to qualify, it must:

    • Have been carried out by someone working within the business who is considered an ‘inventor’. The inventor may not necessarily be the owner of the company; they will be someone who has either discovered something new or has improved upon something already existing.
    • Be undertaken with a view to bringing about a technical advance in some technology, product or service.
    • Be experimental in nature – i.e., no known precedents or existing processes are relevant to this work.
    • Be highly specialist and/or complex in nature.

    What can I claim against?

    You can claim against the following costs:

    • Costs of research and development. This is the cost of designing, making or improving new products or services. It also includes any other expenditure that you make to acquire knowledge about your product or service, for example by conducting surveys or focus groups with customers.
    • Costs of acquiring an asset used for research and development. This includes the purchase price of the asset, as well as capital expenditure such as depreciation (the reduction in value over time) on assets bought after April 2017. If a patent came with your research and development work, you may be able to claim this cost too (see below).
    • Costs of training staff to carry out the research and development using either their own staff who have been hired before 31 March 2017, or those who were hired after that date but before 1 April 2020 (for small companies) or 1 April 2021 (for medium enterprises).
    • Costs of carrying out a feasibility study which shows whether there’s a market for your idea so that it’s worth investing more in developing it into something saleable; this could include market research such as surveys or focus groups with customers, advertising campaigns run during beta testing phases etcetera

    Conclusion

    As you can see, there are a lot of factors to consider when it comes to R&D Tax Relief. If you have any questions regarding this process or need help with your claim, get in touch with our friendly team at WIS Accountancy today.

    FAQs

    How long does it take for HMRC to pay the R&D tax credit?

    R&D payments come from HMRC and take up to 28 days to be paid out. Corporation tax repayments are often much faster – usually within a week of filing for them.

    What is the claim time for the R&D tax credit?

    R&D tax credits have a claim time limit of two years from the end of the accounting period. Prior to this period, you must fill out and return an R&D tax credit claim for anything you’ve identified as claim-worthy.

    To learn more about Research and Development, check out our previous blogs:

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