R&D corporation tax relief: does your company qualify?

Many of you may have heard of Research and Development (R&D) tax reliefs and perhaps even been approached by a firm of R&D specialists offering, in exchange for a commission-based fee, to produce a report to enable your company to make a claim. The relief works by deducting an extra 130% of the qualifying costs from your taxable profit (giving each cost a 230% deduction) and reducing the amount of corporation tax due, or if the company is loss making, then a tax credit of 14.5% can be claimed on the expenditure (subject to a cap based on the amount of the company’s PAYE bill for the period in question).

In order to make a claim for R&D tax relief then you need to have a company (sole trader and partnership businesses do not qualify) that is doing a unique project to develop something new or significantly improve an existing system/process. It is key to ensure that the work done has not already been conducted by another business and that the results are not publicly shared (an online search should help determine this). It is also critical that a competent professional in that field could not readily determine how to achieve the project’s objectives. HMRC will also look at the existing benchmark for that product or process to make sure that your project has “significantly improved” what is already available.

Qualifying costs include staff costs and consumables being used up in the project. However, if the company goes on to sell items produced in the course of its R&D projects, then the cost of consumables that have gone into those products cannot be included as qualifying R&D expenditure. It is therefore very important to identify and exclude any expenditure that is then used to make sales later down the line.

R&D credits are a great way for innovative businesses to gain tax reliefs and the Government is still keen to support R&D projects, even mentioning it in the 2021 Autumn budget. However, HMRC are currently tightening up on inspections and opening up more enquiries into the claims at the moment, halting tax refunds until potential fraudulent claims have been investigated and introducing new procedures in April 2023 to tighten up compliance.

We have seen claims in the farming sector having to be repaid with queries over whether the projects, or the costs included, actually meet the R&D criteria.

If you are currently making a claim with one of the specialist R&D operators you need to be completely comfortable with what is being claimed and why. They may be less prudent over what should be included as qualifying costs and R&D projects than they should, but if so, you will be the one having to justify these expenses to HMRC or perhaps even having to repay some of the tax relief, as we have already seen happen in recent months.

If you are uncertain on whether or not you can qualify, Dodd & Co are here to help!

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