Accounting for R&D tax credits and relief

Research and development tax explained

Companies whose business involves the creation of innovative products, be it software or hardware, will invariably be involved in some form of R&D. If the costs incurred in order to carry out the R&D are of one of the types that qualifies for this relief, in most cases the taxman will allow a further deduction from taxable profit equal to 130% of the qualifying costs (i.e. 230% of qualifying costs are deductible in total). The tax relief can be taken in the form of a reduction in the corporation tax bill for profitable companies, or as a repayable tax credit for companies who are not making taxable profits. The main type of qualifying cost is the payroll cost of staff (including directors) who are involved in the R&D process, but you can also include certain overheads and 65% of subcontracted R&D.

Eligibility and qualifying expenditure

To qualify as R&D, work must be undertaken with the aim of achieving an advance in overall knowledge or capability in a field of scientific or technological uncertainty. It is not sufficient for the advance to relate solely to the company’s own state of knowledge or capability. Generally, development of a new piece of software will qualify if it involves writing new code, but not (say) producing a new website using existing technology. Traditional R&D involving the development of new physical products, such as an innovative piece of equipment, or a new recipe for food or drink, also qualifies.

Research and development tax benefits

Any reduction in the tax burden for companies is welcome, and the relief is designed as an incentive to innovators, allowing them to invest more resources in their business with all of the economic benefits that brings. For start-ups, the availability of a tax refund can be invaluable cash-flow for the business, rather than having to carry forward the benefit of the relief forward until such time as there are profits against which to offset it, giving them the money when they most need it.

How to claim r&d tax credit or relief

The relief is claimed when the company makes it tax filing, once accounts have been prepared. This is normally handled by the company’s accountants and tax advisers, who will help the owner to establish what activity and costs will qualify, before making the claim in the corporation tax return. There is a time limit of two years after the end of an accounts year for making a claim, so if you haven’t done one and think you may qualify, there is time to make a retrospective claim.

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