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What Costs Qualify for R & D Tax Credits?

Staff Writer
November 12, 2020

If your firm developed new products last year, you could leave savings unclaimed should you fail to file for research and development tax credits.

Could you use an extra £63,000 to invest in your business? If so, that’s the average amount per company claimed in R&D tax credits in the UK.

You can use your claim to reduce your tax bill. Alternatively, you can use it to increase your taxable losses.

However, it’s important to work with a tax consultant that has experience with R&D tax credits. By doing so, you can minimize your stress and maximize your claim.

To learn more about what costs qualify for R&D tax credits, keep reading.

What Are R&D Tax Credits?

You can receive R&D tax credits from HM Revenue and Customs as a reward for creating innovative products. It’s an incentive and form of tax relief for companies in the United Kingdom.

The tax credit can provide valuable funding for companies that develop new products or processes. You can use the funds to create new processes or products or improve existing ones.

R&D tax relief can help you reclaim some of the money you spend developing new products and processes. You’d reclaim those funds as a tax credit. You can use the tax credit to reduce your tax bill or increase your taxable losses.

You can apply for the tax credit, regardless of your field or industry. Any enterprise that spends funds on research and development is eligible for it.

R&D plays a major role in competitive commerce. Without it, companies would struggle to squeeze a profit out of the existing market.

Alternatively, companies might solely pursue mergers and acquisitions to acquire new markets or products. Instead, R&D tax credits compel companies in the United Kingdom to pursue exciting innovations.

What's not usually included are other business expenses such as:

  • office costs - eg. stationary, equipment
  • travel costs - eg. mileage, car finance or subscriptions, insurance
  • clothing expenses - eg. uniforms
  • staff costs
  • things you buy to sell on - eg. stock or raw materials
  • financial costs
  • costs of your business premises - eg. heating, lighting, business rates
  • advertising or marketing - eg. website costs

What Costs Qualify for R&D Relief?

You can claim R&D tax credit qualified expenses for R&D. Imagine, for instance, that you operate a software company. In that case, you might claim the salary of employees directly involved in research and development.

You may also qualify to claim the salaries of employees who are indirectly involved with the process. Also, you can claim up to 65% of contract staff costs related to research and development.

You can also claim the costs of consumable items used for R&D. You may also claim software licenses, power, fuel and water used during the research and development process.

Alternatively, you might operate an engineering company. In that case, the cost of R&D for resolving a scientific or technical problem may qualify for a tax relief claim.

For example, a study regarding the design functions of a structure to improve performance, quality and safety might qualify for the tax credit. Alternatively, a civil engineering project that assesses structural and drainage requirements for bridge and road design might qualify for a claim.

How to Calculate R&D Tax Credit

To qualify for the small to medium-size enterprise R&D tax credit, you must employ less than 500 staff members. Your annual turnover cannot exceed £100 million, and your balance sheet cannot exceed £86 million. If you meet these qualifications, you qualify for the SME R&D scheme.

The scheme will allow you to reclaim up to 33% of your R&D costs. You’d make your claim against your corporate taxes.

Alternatively, you might receive your claim as a cash credit from HM Revenue and Customs. However, some nuances of the R&D tax rules can affect your eligibility to make a claim. For this reason, it’s important to work with an experienced consultant when claiming the R&D tax credit.

For example, some companies can deduct an extra 130% of their qualified R&D expenses from yearly profits. This amount is in addition to the normal 100% deduction.

Therefore, you might have eligibility for a 230% deduction. You can also claim a tax credit if your company is reporting a loss for the year.

Figuring Out Your Claim

It would help a great deal if there were an R&D tax credit calculator to help you figure out your claim. However, no such tool exists. Instead, you may find that a brief explanation of the rules and an R&D tax credit calculation example are helpful.

To calculate your claim, you’d need to figure out your allowable expenditure. Next, you’ll need to convert the allowable expense into an R&D tax figure. Finally, you’ll need to enter the tax relief amount in Box 650 of your corporate tax return.

Expert Help for R&D Tax Credits

Now you know more about R&D tax credits. However, it can prove challenging figuring out the nuances of a claim.

Nevertheless, it’s important to know all the details of the scheme so that you can maximize your benefit. Fortunately, an expert consultant can help you to do just that.

Something Financial can take over the complex task of filing your R&D tax claim. More importantly, however, we’ll make sure that you receive maximum relief.

We have a proven track record of successful R&D tax claims across the UK. Contact a Something Financial specialist today at 0800 2808982 or connect with us online to take the first step towards maximizing your R&D tax credit.

We can help you realise your full potential

Speak to a tax specialist today and find out how much you can claim.