The best way for a company to save tax?…R&D CLAIMS!

R&D

Written by James Fairhurst

James has a background in accounts production, Corporation Tax and VAT for Sole Traders, Partnerships, Limited Companies and Academies. He is able to quickly and reliably gain an understanding of the accounting needs of a business, helping them to stay on top of their deadlines.

November 5, 2021

For applicable companies, an R&D claim can be a fantastic way to bring your Corporation Tax bill down.

Research and Development (or R&D) is something which many companies do without realising. Creating new systems or processes is all a part of R&D, especially if it is something which hasn’t been done before. HMRC love this, as it contributes to the UK economy. As such, they incentivize R&D by providing significant tax relief and tax credits for companies that do it. This is done in the form of an “R&D claim”.

Who can apply?

How much tax can it save you?

How do you make a claim?

Here is a rough idea of how a claim might be able to help your business:

Who can apply?

Any company can apply for R&D if they have expenditure relating to a project that counts as R&D.

HMRC states the following requirements:

Projects that count as R&D

The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. It cannot be an advance within a social science – like economics – or a theoretical field – such as pure maths.

The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.

To get R&D relief you need to explain how a project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field

Your project may research or develop a new process, product or service or improve on an existing one.

Advances in the field

Your project must aim to create an advance in the overall field, not just for your business. This means an advance cannot just be an existing technology that has been used for the first time in your sector.

The process, product or service can still be an advance if it’s been developed by another company but is not publicly known or available.

Show that a professional in the field could not work this out

You should explain why a professional could not easily work out your advance.

You can do this by showing that other attempts to find a solution had failed.

You can also show that the people working on your project are professionals in that field and get them to explain the uncertainties involved.

Show there was uncertainty

A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible or how it can be done – even after referring to all available evidence.

This means that your company or experts in the field cannot already know about the advance or the way you achieved it.

Explain how you tried to overcome the uncertainty

You should show that the R&D needed research, testing and analysis to develop it.

You need to be able to explain the work you did to overcome the uncertainty. This can be a simple description of the successes and failures you had during the project.

How much tax can it save you?

In this example, we assume that we have a company that is developing software. There are many expenses that can be considered part of the research and development of the software…

As you can see in the table above, various costs contribute to the R&D claim, including staff costs such as salaries, employer’s national insurance and pensions. Often, R&D staff costs are based on a percentage of the overall cost of employment for each employee. So if you have a staff member that works on R&D 50% of the time, you can include 50% of their cost of employment in the claim.

PLUS, director’s can claim too.

Note however, that you can only claim for 65% of any subcontractor costs.

Once all the expenditure is collected, the total figure is uplifted by an additional 130%!

By submitting the R&D claim, the company in the example above gets to deduct an additional £21,190 from taxable profits. With corporation tax at 19%, this means a saving of £4,026!

Your tax saving may come in the form of a reduction to your corporation tax bills (which may be spread over more than one year). Or, if you are making a tax loss, you could be eligible for a tax credit – i.e. generally you receive a cheque equal to 14.5% of the lower of:

  • Tax loss
  • Total R&D claim

Limits:

 From 1st April 2021, R&D is limited to £20,000 plus 3 x PAYE/NIC liability for the period.

This cap will likely impact smaller businesses with limited staff on payroll an who subcontract a significant level of their R&D work. However after consultation, HMRC allowed the PAYE/NIC liability of related parties artibutable to the R&D to also be included in the calculation of the cap.

Please note these rules have been simplified for ease of understanding. Professional advice should be sought from a chartered accountant to help understand the full impact of the R&D cap on a business.

How to make an R&D claim

How do you make a claim?

Making a claim is done as part of the corporation tax return. If you have already submitted the return, you can amend it at a later date. Just bear in mind, the deadline is 2 years from the end of your accounting period.

HMRC recommends that you back up your claim by providing a “narrative”. The narrative explains what research and development the company is doing and why it is suitable for an R&D claim. The narrative isn’t required, but it can help to speed up the claim and avoid any problems later down the line.

Xoba has a FREE NARRATIVE TEMPLATE to help you back up your claims. It provides simple, helpful prompts to ensure you satisfy HMRC’s narrative requirements.

Here at Xoba, we are experts in R&D. Not only do we make the application for you, we also help you put together the narrative and maximise your claim. 

Simply let us know you wish to make a claim, we will ask a few questions and in only a few days you will have a draft claim ready for submission.

Plus, our fees are substantially lower that other firms!

Xoba charges a flat rate of 15% commission on the total tax saving, with no up front costs. The commission is deducted from the payment you receive.

Other firms charge as much as 30% which can cost companies a fortune!

So, don’t miss out, give us a call today and see how much you could save. Our clients’ typical claim range is from £5,000 to £100,000.

 

Save ££,£££’s by claiming R&D for your company NOW!

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