Tag Archives: tax relief

What a relief! Is your business missing out on R&D?

R&D_Tax_Relief_SMEOn more than one occasion I have been told by a business owner – “My accountant says I don’t qualify for Research and Development tax relief”. By digging a bit further it seems that the accountant has either not come across the tax relief before or assumes it is just for large companies or highly scientific companies. This is not the case and SMEs can qualify for R&D tax relief.

The whole purpose of this tax relief is to encourage innovation and reduce the risk to UK companies of funding research and development which might fail.

Several of my SME clients have claimed R&D tax credits at some stage in their R&D journey.  In fact, you can go back retrospectively and claim the relief for up to two years so it is well worth investigating.

Most of my clients are claiming R&D tax relief for software development, not something always focused on in the literature.

The R&D tax relief process

Whilst you can contact HMRC to see if they think you are eligible this is not necessary as long as you take some time and effort to write a good narrative to describe your project.

I get my clients to build their narrative around the four key questions getting them to consider each one in turn and ensure that they have answered the questions.

1. What is the scientific or technological advance?

Are you doing something new and advanced that no one else has managed to do? Are you being innovative?

2. What scientific or technological uncertainties were encountered?
Where were the potential failure points, did you know the outcome?

Make sure your explanation is clear and easily understood by a non-technical person (e.g. your accountant!).

3. How and when were the uncertainties overcome?

Give examples of the timeline.  You need to let HMRC know how long it took you to do parts of the development.

4. Why wasn’t the knowledge being sought readily deducible by competent professionals?
This is where you need to clearly demonstrate how innovative your idea is and that it requires specialised knowledge to do.

It is best to send your narrative along with your cost analysis on your CT600, although it can be sent afterwards.

A few questions that clients often ask: 

But I have a grant – this rules me out?

No, if you have a state aid grant however small that covers the same project then you cannot use the SME scheme but you can still claim under RDEC (the research and development expenditure credit) which also allows a loss-making company to get tax credits back.  However, it is worth checking the impact of a grant as it can cost you a lot in the long term.

What R&D costs can I claim?
Not all costs are allowable and it is best to track employee hours to be able to demonstrate that their time was spent on the project. You can also claim 65% of outsourced costs, very useful if you are in software and are using overseas programmers.

Not everything can be claimed, for example, hosted server costs are not eligible and these can be a big cost for software and IT researchers.

Is it worth the effort?
Absolutely, one of my SME clients has had several hundred thousand pounds back which has greatly helped fund the project. According to one website, the average claims for SMEs is £54,000 back in cash or corporation tax relief.

You may find this guide from HMRC helpful too.

Make sure you're not missing out on R&D tax relief and chat to a FinanceHeads member, like myself, who has experience of claiming R&D tax relief for owner-managed businesses. Michael Cartwright can put you in touch with the most appropriate FinanceHead for your business.

Katherine MacIver
FinanceHeads Member