The UK invests in innovation. The Research and Development Tax Credit is a government-sponsored initiative.
An overview of the scheme
A company can only claim R&D tax credits if it is liable for Corporation Tax. There are two means by which companies and corporations can recoup costs; the incentive is provided in either the form of tax relief or as a tax credit. The type of claim an enterprise makes depends on the size of the business. All tax credits, both for small and medium enterprises and large companies, make their R&D Tax Credit claim on Company Tax Return Form CT600.
Less than 500 employees?
For smaller companies
Small and medium sized enterprises (SMEs) — those with either an annual turnover under €100 million or a balance sheet under €86 million — receive state aid. In the case of the R&D Tax Credit, state aid is either tax relief or a cash credit. Enterprises that make a profit from research and development are given tax relief. Those that lose money as a result of research and development are given a cash credit so they can recoup some of their losses. The objective of state aid is to give enterprises a competitive advantage, within the limits of European Union Law, that the open market does not provide.
Small and medium enterprises are eligible for relief of 230 percent on allowable R&D costs.
More than 500 employees?
For larger companies
Large companies — corporations with annual turnover over €100 million or a balance sheet over €86 million — are eligible for the Research and Development Expenditure Credit (RDEC). It became compulsory on 1 April, 2016, and is an 11 percent taxable credit. That means a 20 percent taxpayer benefits by an 8.8 percent net after the credit is taxed. Tax relief is only available for those large companies that spend at least £10,000 on research and development. “For taxpaying companies, [the RDEC] reduces the claimant company’s corporation tax liability.”
What can be claimed?
Limits to what’s allowed
Two types of expenditures can be claimed: revenue expenditures and capital expenditures. The government compensates companies for revenue expenditures with the R&D super-deduction scheme, which allows companies to use the tax credit for staffing costs, contract employee costs, consumables, hardware and software, utilities, and paying for services from non-in-house vendors. Capital expenditures are covered by the R&D Allowances scheme (RDA). RDA is an accelerated 100 percent reduction for qualifying R&D capital expenditure.
Am I eligible?
Only certain industries
Determining the eligibility of a company for the R&D Tax Credit is based on the government’s definition of research and development. In layperson’s terms, a company must be inventing the wheel to be eligible for the R&D Tax Credit. R&D must be a solution to a problem, not the refinement of an existing solution. Reinventing the wheel — even if the modification makes it leaps and bounds better — does not make a company eligible for an R&D Tax Credit. But, innovating a technology that will make wheels better is, by definition, research and development.
Nineteen industry sectors qualify for the R&D tax credit, including:
- Agriculture, Forestry and Fishing
- Electricity, Gas, Steam and Air Conditioning
- Transportation and Storage
- Accommodation and Food
- Information and Communication
- Real Estate
- Professional, Scientific and Technical
- Arts, Entertainment and Recreation
- Other services activities
What are the stats?
Some interesting numbers
- In 2000, there were 1,860 R&D Tax Credit claims. In 2014, there were 16,160.
- More than £11.4 billion in tax relief has been claimed since 2000.
- By the end of 2013-14, more than 33,800 companies had made claims under the SME (Small and Medium Enterprise) scheme since it began in 2000-01, and over 7,800 under the large company scheme, which launched in 2002-03.
- Manufacturing; Professional, Scientific and Technical; and Information and Communication sectors made up 81 percent of the total amount claimed in 2013-14.
How do I claim?
Filing your claim yourself
The CT600 Guide is the key to successfully filing for the R&D Tax Credit if you choose to file on your own. The CT600 Guide is a 42-page moderately in-depth explanation of how to file. The guide explains how to file a Company Tax Return and who needs to deliver one, when to file, how to write the return declaration, and how to deliver your return to HMRC.
In addition to the CT600 Guide, it is important that you have a firm grasp of the recent budget changes to tax legislation and rates. You also need to be aware of the supplementary pages you may need to complete, including information about loans to participators by close companies, controlled foreign companies and bank levy, and group and consortium pages if you are claiming or surrendering relief under group or consortium or unrelieved foreign tax provisions.
In all, there are 10 potential company operations that will require supplementary pages, including:
- Insurance Information
- Tonnage Tax Information
- Corporate Venturing Scheme
- Disclosure of Tax Avoidance Schemes
One of the most critical aspects of filing for the R&D Tax Credit is understanding when you must deliver the CT600. You must pay close attention to deadlines for filing your Company Tax Return. The UK Government provides a detailed guide on return deadlines in CTM93030. It is also important to have an understanding of late filing penalties.
What information do I need?
Completing your claim yourself
The actual filing of the CT600 includes determining the type of company you operate — a close investment holding company or a Real Estate Investment Trust C tax-exempt company, for example. Next, you must perform your company tax calculations. This includes calculating the following:
- Income, chargeable gains
- Profits before other deductions and relief
- Deductions and relief, profits chargeable to corporation tax
- Reliefs and reductions in terms of tax
- Tax outstanding or overpaid
- Tax reconciliation
- Research and development (R&D) or films enhanced expenditure
- Land remediation enhanced expenditure
- Charges and allowances included in calculation of trading profits or losses
- Charges and allowances not included in calculation of trading profits or losses
- Qualifying expenditure
- Maximum available for surrender as group relief
- Small repayments
- Repayments for the period covered by this return
What could go wrong?
The most difficult component, aside from understanding the nomenclature, is applying the information you have to the appropriate sections of the CT600. Failing to provide enough information or neglecting to include pertinent information can prevent you from being granted an R&D Tax Credit.
For many companies, R&D Tax Credits can mean substantial amounts of money. If your company is likely only to gain a small amount of money from the R&D Tax Credit, filing on your own may not cost you a great deal. However, if substantial amounts of money are to be made, and you are not confident you understand all the concepts requiring completion in the return, it may be best to seek an R&D Tax Credit specialist.
Should I use a specialist?
The safe approach
The benefits of using an R&D Tax Credit specialist is expediency and effort-free thoroughness. While the CT600 Guide is designed to help people inexperienced in filing for the R&D Tax Credit, it does require considerable time to complete. Completing the CT600 without committing errors is critical, especially if the deadline is tight. Avoiding penalties should be a major priority for every company filing for the R&D Tax Credit.