Claim Your Business Tax Credits

Thousands of entrepreneurs are not claiming research and development (R&D) business tax credits from HMRC. One reason is the misunderstanding about the term “R&D”. Another is the complexity of the scheme: the HMRC guidelines are more than 1,000 pages long.

Nonetheless, these business tax credits average around £20,000 each. Some entrepreneurs have even managed to claim back six-figure sums. This money reduces a company’s tax bill, and for qualifying small or medium-sized businesses it may even come in the form of cash.

R&D

The government has a legal definition of research and development that doesn’t necessarily match what many entrepreneurs understand by the term in the commercial world.

In broad terms, R&D refers to a project that aims to improve knowledge or capability in science or technology. Such an improvement must apply to the overall scientific or technological fields and not solely to the knowledge or capability within a business.

Some consultants who give advice about R&D tax credits also say that a business doesn’t have to engage in research as well as development. Product development alone may be enough to allow a company to qualify for help.

Two Types of Help

Those entrepreneurs who believe they conduct qualifying R&D may be able to claim two types of tax assistance. The first is an R&D tax allowance; the other is R&D tax relief.

Tax Allowances

The tax allowances apply to most research and development capital expenditure apart from dwelling and land purchases.

The allowance is 100%. An entrepreneur can therefore reduce taxable profits by the full amount of R&D within the financial year. If a business makes a loss, an entrepreneur can take this forward and offset it against future profits.

Tax Reliefs

There are two research and development tax relief schemes. The first applies to micro, small and medium-sized enterprises (SMEs); the second applies to large businesses.

The main qualifying conditions for the first scheme are as follows.

An entrepreneur must
spend at least £10,000 per year on R&D
own any intellectual property that the R&D creates
not be working under contract
not be receiving state aid for the project
not be a sole trader or in a partnership arrangement

Furthermore, an entrepreneur cannot claim for expenditure supplied by another business.

The relief comes as 175% of qualifying expenditure against taxable profits. If this causes a loss, an entrepreneur can ask to surrender it in return for a cash credit that represents up to 14% of the loss.

With the large company R&D scheme, an entrepreneur should contact HMRC to discuss possible tax relief. If a business can make a claim, the relief is 130% of R&D qualifying expenditure against taxable profits. Entrepreneurs cannot claim for a cash credit by surrendering any loss.

Making a Claim

Limited companies can claim R&D tax allowances on their corporation tax returns. Sole traders can make the claim on an HMRC self-assessment income tax return.

To make claims for R&D tax reliefs, entrepreneurs running micro businesses, SMEs or large companies must complete the relevant section of their corporation tax returns.

In all instances of R&D claims, entrepreneurs should give explanations of expenditure on their tax returns and seek advice from HMRC if necessary.