R&D Tax Credits
What are R&D Tax Credits?
Simply, R&D Tax Credits are a tax break put in place by the UK Government in 2000, aiming to encourage companies to spend more on R&D in the UK, because the UK believes it is advantageous to the UK economy to encourage UK companies to spend more on R&D.
The money is paid as a corporation tax refund, or as a negative corporation tax, after the end of the financial year, tax free, and can be used for anything – hiring more developers, buying equipment, or even paying out dividends.
How do I qualify?
There are two aspects of qualifying for R&D Tax Credits, both of which must be demonstrated to HMRC:
The R&D must be meet HMRC’s rather detailed criteria. In short, a project qualifies if it constitutes an “advance” in science and technology, and that’s defined as an improvement in overall knowledge and capability in a technical field. But that’s jargon! What does it mean?
We find it’s easier to use examples: On one end of the scale, setting up WordPress or Drupal wouldn’t qualify. On the other extreme, developing the Google AI that beat a human Go player for the first time would definitely qualify. In between, here are things that probably qualify or probably don’t:
- A logistics platform that sources a fresh product across Europe and automatically calculates how to get it delivered to the right locations on time and at what price to sell it in those locations would probably qualify.
- A website with a bespoke contact form that asks for some specific details relevant to the business would probably not qualify.
- A platform that enables people to upload video, and which uses image recognition to analyse and tag the videos to make them searchable, would probably qualify.
- A hammer with a colourful rubber handle probably wouldn’t qualify.
- The development of a new type of rubber that has special technical properties probably would qualify.
Scale and performance can also be a factor:
- A website that enables people to send short messages and images to each other would probably not qualify…
- … but if it does so for 400 million daily active users, it probably would, due to the technical challenges involved.
- A search tool that searches across a few hundred simply structured documents on a hard drive probably wouldn’t qualify…
- … but if it is providing instant results while searching across terabytes of data spread over dozens of corporate shared drives, it probably would.
You can find more information on whether your project qualifies here.
Unfortunately, it’s not enough for the technology to qualify. You also need to have spent money developing it, and in the right ways so that HMRC will count it for your tax credits. Thankfully, the rules around is much more clear-cut than on the technology.
You can get R&D Tax Credits if this is true:
- You have a UK company;
- That UK company must have actually spent money (not sweat equity) building a technology that meets the criteria above;
- That money was spent on either:
- Staff on PAYE;
- External contractors paid a day rate;
- A subcontractor who quoted a price and then delivered the project for you;
- Materials that were used up during the project and could not be sold on for full price;
- Software licences (not hosting) that you needed to deliver the project.
- That money was spent during your last two completed financial years (could be up to 36 months ago).
That’s it! There are a lot of further details and edge cases to think about, but if you meet all those criteria you are pretty much certain to qualify.
How much is it worth to me?
The precise calculations can be a bit daunting depending your exact situation (though they are less daunting if you read through our instructions below), but as a thumb rule, if you’re a profitable SME you can expect about 25% of your R&D costs refunded. If you’re loss-making SME, you can expect about 33% back. If you’re around breakeven, it can go down to 15%.
If you’re doing R&D in a large company, you can typically get up to 10% of your R&D costs back.
So if you’re running a highly innovative and profitable tech company that’s spending half a million a year on engineers and developers you could get upwards of £125k from the R&D Tax Credits scheme.
This sounds great, how do I get this?
The easiest and quickest way is to speak to a specialist (like us) and let them do all the work. However, if you have the time, you can definitely do it yourself by following the instructions on this page and on the articles linked from here.
The key mechanism to get your R&D Tax Credits is that you need to fill the right boxes in your CT6004, and file that (or refile it, if you are making a claim for years that you had already submitted) along with an explanation of why your projects qualify (also known as a Technical Narrative5), and a calculations table that justifies why you claimed the amount you did.
The essential point of that filing is to convince HMRC that you understand their definition about what activities and costs qualify, and have applied it diligently. If they believe you got it right, they will pay you the correct amount within 2 to 8 weeks depending on their workload.
If they think you got it wrong, you can end up with an HMRC enquiry. That sucks. You don’t want that. At best it can involve a few questions that delay you by a couple of months. At worst, it can involve a gruelling meeting and penalties for misfiling. Hopefully with our guide here you can get it right every time, but if you’re worried, please do use a specialist.
So to summarise: you need to do three things:
- Write a convincing Technical Narrative that explains why the technology qualifies according to HMRC’s criteria.
- Put together a clear table summarising the Financial Calculations that led you to the amount that you’re claiming.
- Amend and file the CT600 with the technical narrative and financial calculations attached.
How do I write the technical narrative?
Luckily for you, here at GrantTree we’ve put together the only guide there is anywhere on the web that explains how to write a great technical narrative, with examples. Here are the key articles you will want to read:
- How to nail the technical narrative before you even start writing – Like any such complex activity, there are things you can do before you even get started that will set you on the right course, or not. In this article: getting the right data.
- How do I organise the technical narrative? – If you speak to a specialist like us, they’ll often talk about something called a “project”. This is the basic organising unit of a claim, but its definition is quite flexible. Read more here.
- How do I collect the data I need? – The person who did the R&D is often not the right one to write the technical narrative. But you need to get data out of them. This article explains how to get that data and gives a full example of what the raw data might look like.
- How do I write the technical narrative? – The final piece of the puzzle! In this article, you will find a clear guide to how to go about writing this document, as well as a full example of what the end product looks like.
How do I prepare the Financial Calculations?
We are still working on fleshing this topic out with more articles, but the essence of it is that you need to demonstrate how you’ve arrived at the final number that you’re claiming. For this, you’ll first want to read the following articles:
- Which types of costs qualify? – The whole picture of what you can claim for. If it’s not on this list, you can’t claim for it.
- Can I claim for dividends? Travel expenses? – Still not clear on what you can claim for? Some more answers here.
- Can I claim for Capital Expenditure? – This is one of the most commonly encountered “accounting problems” for tax credit claims.
These outline the key concepts for deciding which costs to include. One important note is that not all costs are equal. There’s an art to assigning the right percentages to some categories, but in essence you want to make sure that you are only claiming for directly contributing activities and something called “qualifying indirect activities”, when it comes to full time staff. The percentage of a full time staff member’s time that qualifies can be anything from 5% for someone who provides occasional input and direction to the project, to 95% for a highly technical person assigned full time to the project.
For the categories of “externally provided workers” and “subcontractors”6, the maximum percentage is reduced to 65% – so an EPW who is full time on your project would only have 65% of their cost allocated to the R&D.
Once you’ve got this basic table of costs, have a read through the following articles for how to calculate the claim:
- How do I claim if I’m unprofitable? – Claims by unprofitable businesses, or businesses with small profits, are calculated differently, and typically result in very different amounts, sometimes less, sometimes more. Learn all about it here.
- What are the exact rates to apply? – HMRC keeps changing the rates every year, to keep things interesting. What are the current rates? How do you deal with years that straddle a rate change (as will be the case for almost every year)? All your answers here.
In essence, you need to apply the correct rate of enhancement and surrender (if applicable) to arrive at the correct numbers, and then fill them in in the right part of the CT600.
How do I fill in and file the CT600?
We’ll be updating this section with more content later.
What happens after filing?
After filing, your claim should go to an HMRC R&D unit where it may be reviewed by an inspector. If the claim was well prepared and clear, they may well accept it immediately and you could receive the money as soon as two weeks later (in extreme cases) or, more likely, 4-6 weeks later, or 8 weeks later during slow periods.
If the inspector finds the claim lacking in some aspect, they will be very unlikely to reject it but they will certainly ask for follow-up questions. In the worst case scenarios of deliberate and obstructive fraud (which we’ve never actually seen happen despite well over a thousand claims filed), they may launch a full enquiry into your whole accounts and impose severe penalties.
Most likely, there will be some form of process to try and help reassure both you and HMRC that you got the claim right. Here are some articles to help you through this process if it happens:
- What are HMRC Audits like? – Hopefully you never need this section, but if you’ve received an inquiry letter from HMRC, here’s how to parse it.
- What does a friendly HMRC enquiry letter look like? – Curious? Nosy? Never seen one before? Hope to never see one, but want to know what it’s like? Click and find out!
If the enquiry looks a bit too much for you to handle, we recommend contacting a specialist like GrantTree to help (though they’d naturally prefer to be involved earlier in the process and avoid the enquiry altogether). In most cases, it needn’t be such a scary process, so long as it’s handled right.
Anything else I should know?
R&D Tax Credits is one of those topics that seems fairly straightforward once you have the basic concepts in place, but it is full of edge cases. Perhaps it’s because of the types of clients that naturally end up working with us, but our experience is that only about 20% of clients are “straightforward”. 80% involve at least one edge case, and a small portion of those can be fiendishly complicated.
So with that in mind, the additional topics below are by no means exhaustive, but may be helpful nevertheless.
- Should I get my accountant to file R&D Tax Credits? – Getting your accountant to help with seems like a good idea, but there are several things you should know about how accountants perceive (or fail to perceive) Tax Credits.
- Can I claim every year? – The answer’s obviously yes, but here’s how and why.
- Should I use a specialist for large claims? – Specialists can feel expensive, particularly when dealing with larger claims. Here are some points about why they can still be worthwhile even with a larger price tag.
- What are the PAYE/NIC caps and when do they apply? PAYE caps are no longer in force since 2012, but offsets still apply. Read more here.
- How much should my accountant charge me? – Many accountants these days say they “do R&D Tax Credits”. What does that mean, and how much should they charge?
We will publish more over the coming months. If you can’t wait to find out everything there is to know about R&D Tax Credits, you can also browse HMRC’s own websites on the topic: the summary, and the full legislation.
This is a term HMRC uses to refer to R&D that fits their specific criteria involving “advances in science and technology” and “technological uncertainty” – more on that later↩
A company with more than 500 employees or with both turnover over €100m and assets above €86m↩
That’s the form with all the shaded boxes that you have to submit to HMRC every year along with your accounts↩
Writing a good technical narrative can be a bit of an art form, but our guide below should help you↩
These are HMRC jargon terms that refer to contractors that are basically like employees but paid day rates via an umbrella company (externally provided workers) and companies that deliver on a specification (subcontractors)↩