Research and development (R&D) tax credits in tech and science sectors can provide a significant opportunity to reduce costs and reinvest in innovation. However, many companies miss the full benefits due to a lack of understanding or underutilisation of these credits.
This post outlines strategies to help you maximise your R&D tax credits.
Understand the eligibility criteria
The first step to maximising your R&D tax credits is understanding whether your activities qualify. The UK government defines R&D for tax purposes as work that seeks to advance science or technology. This can include improving existing products, services or processes. It is likely to qualify if your project involves overcoming scientific or technological uncertainties.
To ensure eligibility, keep detailed records of your R&D activities. Document the problem you aim to solve, the steps you take to solve it and the scientific or technological advancements you achieve. This documentation will be crucial when you submit your claim.
Identify all qualifying costs
Once you have determined that your activities qualify, the next step is to identify all the costs associated with your R&D. Qualifying costs include the following.
- Staff costs: Salaries, wages and other expenses for employees directly involved in R&D.
- Subcontractor costs: Payments to third parties who carry out R&D on your behalf.
- Materials and consumables: Costs of materials and resources used in the R&D process.
- Software: Costs of software used directly in R&D activities.
Ensure you capture all these costs accurately. Keep detailed financial records and allocate costs specifically to R&D projects. This will help maximise your claim and provide evidence if HMRC audits your submission.
Make use of the R&D expenditure credit (RDEC)
The R&D expenditure credit (RDEC) scheme is a key way to claim R&D tax credits for larger companies. RDEC offers a credit worth 13% of your qualifying R&D expenditure, which is taxable. This credit can still result in a substantial net benefit despite being taxable.
Small and medium-sized enterprises (SMEs) should know that they can also claim under the RDEC scheme if a larger company has subcontracted them or received a grant or subsidy for their R&D work. Understanding how to navigate these options can significantly impact the amount you claim.
Leverage the SME R&D tax relief scheme
The R&D tax relief scheme can be even more beneficial for SMEs. It allows companies to deduct an extra 130% of their qualifying R&D costs from their yearly profit, in addition to the normal 100% deduction, for a total of 230% deduction.
Sometimes, this can be converted into a payable credit if the company is loss-making. The key is to ensure you accurately report your costs and understand how to maximise the deductions available.
Consider grants and subsidies
Grants and subsidies can impact your R&D tax credit claims but do not necessarily exclude you from claiming. Understanding how these funds interact with your R&D tax credits is crucial. For example, if you receive a grant, you may still be able to claim under the RDEC scheme, even if you are an SME.
Review the terms of grants or subsidies carefully and consult with a specialist to understand how they affect your eligibility and the amount you can claim.
Use technology to streamline the process
Utilising technology can streamline the process of claiming R&D tax credits. There are software solutions available that can help track and document your R&D activities, manage financial records and prepare claims. These tools can save time, reduce errors and ensure you capture all eligible costs.
Investing in the right technology can make the process more efficient and increase the accuracy of your claims.
Maintain comprehensive records
Detailed and accurate record-keeping is essential for maximising R&D tax credits. Maintain records of all R&D activities, including project plans, progress reports and outcomes. Financial records should be thorough, with clear allocations of costs to R&D projects.
Comprehensive records provide evidence to support your claims and ensure compliance with HMRC requirements. They also make it easier to identify and capture all qualifying costs.
Review and optimise your claims annually
Finally, make it a practice to review and optimise your R&D tax credit claims annually. Assess your activities and costs yearly to ensure you capture everything that qualifies. Consult with experts to identify any legislation changes or new claims opportunities.
Regular reviews and optimisations can help you manage your claims and maximise your business’s benefits.
Seek advice
R&D tax credits offer significant opportunities for businesses in the tech and science sectors. You can maximise your claims and support continued innovation by seeking expert advice.
If you need assistance with your R&D tax credit claims, contact FMA for expert advice and support.
