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What is Research and Development (R&D) Tax Relief?

Research and development tax relief or R&D tax relief is a government incentive for businesses across the UK. It is all about helping business to grow. If you have developed a new product, changed a process or reimagined a procedure then there is a good chance that you will qualify for R&D tax relief. The traditional image for research and development – one of men in white coats testing in a laboratory – doesn’t apply here. If you make changes to the way you run your business, then there is a good chance you might qualify for this government incentive, administered by the HMRC.

There are two forms of R&D tax relief –

  1. Small and medium sized enterprises (SME) R&D Relief
  2. Research and Development Expenditure Credit

The first is for a business with fewer than 500 staff and a turnover of under 100 million Euros, while the latter is for larger companies. We help businesses of all sizes to understand their R&D tax eligibility and submit claims to the tax man.

It is designed to support companies that are innovative and make their operation more efficient. This is part of the UK government’s wider plan to make sure the nation is as competitive as possible for the future. This has become particularly relevant with Brexit and all the challenges this brings. If you have a project that meets the HMRC definition of research and development, then you may be able to claim tax relief on the expenditure relating to your R&D activities. This is a useful way for UK business to recover some of the money spent and put vital cash back into their balance sheet.

What are the benefits of using a specialist?

Using a specialist means that you have peace of mind that the R&D tax claim will work for you and your business. It gives you –

  • Peace of mind that you have a maximised claim
  • Security that someone else will deal with the HMRC on your behalf
  • Knowing that your claim will be far more likely to be accepted
  • Back up that the specialist will answer any questions and deal with an investigation, should that ever happen

And when you work with Lumo, there are other benefits to think about, such as –

  • A 100% success rate with the HMRC
  • A team of specialist that are there at the end of the phone for you
  • An average claim in excess of £35k, meaning a huge financial benefit to your business
  • A team with a vast knowledge of different industries so we can understand and support your claim effectively

It is that peace of mind that you are in the hands of a specialist that helps you sleep at night. Dealing with the tax man can be enough to give people nightmares. Relax knowing that we will take care of this on your behalf. Businesses thrive when they use a specialist to perform tasks that are not part of their normal everyday operation. We maximise a claim and deal with it all with the minimum of fuss, letting you concentrate on your business, your team and your customers.

Is it worth my time to complete an R&D tax claim? How much can I expect to get back?

Yes! It really is worth your time. We find that many business owners have a lot on their plate and looking into something else feels like ab burden. But the average size of an R&D tax claim we submit on behalf of our clients is over £35,000. That is a significant sum for many businesses and one that can’t be overlooked.

There is a time cost. Submitting an R&D tax claim isn’t something you can rattle off in a few minutes. You will need to –

  • Read and understand the information on the HMRC website
  • Decide what R&D is in your business
  • Define the projects you have carried out
  • Separate the costs for R&D
  • Complete the form
  • Gather the supporting evidence

If you have little or no knowledge of the tax system, then this could take you a few weeks to gather as additional time in your business. Your accountant may be able to support you with some of the financial data.

But if you are busy, this may be a stretch to complete. The clock is ticking s you can only submit claims from the last 2 tax -years in addition to the current one.

But, don’t worry. We are here to help. If you don’t have the time, then we will pick all of this up for you. We take the strain and deal with the stress of speaking to the tax man, so you don’t have to. We have the knowledge and experience to submit your R&D tax claim and secure the cash for your business while you get on with what you do best – running your business.

How far back can I claim R&D Tax Relief?

The main focus of many businesses is the current financial year, and with good reason. With R&D tax relief, we can make a claim not only for the current financial year, but for the two previous tax years in addition. If you have not made a claim for the last 2 tax years but carried out research and development activities, then you should look at getting all of your information together as quickly as possible. Once the deadline passes and the calendar reaches 6th April, you lose the right to be able to make that claim and put much needed cash back into the business. As with many things administered by the HMRC, these are strict rules and exceptions will not be made.

With this in mind, it pays t be organised. We suggest that you keep notes of all the projects that may end up being part of an R&D tax claim at some stage in the future. This means that, rather than trying to remember what happened far in the past, you will have all the data needed to send to the HMRC. They need to know the uncertainties you faced and how you overcame these. Having quality notes will allow you to document the project in sufficient detail for the HMRC to make a decision and pay you the R&D tax relief.

We find that the first claim for R&D tax relief is a large one, as it often takes into account three tax years. The money that comes back into a business at this stage can be used for any legal purpose. If you find that you are close to the deadline then you may need the support of a professional to help you make that claim and secure the money that could make a significant difference to your business. Speak to us to find out how we can help you apply for R&D tax relief today.

What are the chance of my R&D Tax Claim getting investigated?

The reality of it all is that there are very few investigations relating to R&D tax credits. If you submit your forms in the correct manner and really understand what the HMRC is looking for then you reduce this possibility right down to almost zero. This is why it can be beneficial to work with a company like Lumo. We have the experience to help you through the process and we take all the strain on your behalf.

There are several areas where you can ensure you submit your application for R&D tax credits in a way that reduces the chance of being investigated –

Avoid jargon. The use of technical language will only prompt the HMRC to contact you for more information. They are tax experts but don’t understand the technical side of your business. Make sure your form is easy for them to understand and avoid an investigation.

Double check. The last thing you want is to submit a form with basic errors on it. Check through the figures again to ensure that you are sending something accurate to the HMRC. This means you won’t get a letter asking you to explain at a later date.

Never overestimate. If you don’t keep accurate records, then you can find you need to estimate costs. And with claims going back over the last 2 tax years as well as the current one, there may be the need to estimate. Don’t be tempted to add costs that are not linked to your R&D activities. The tax man deals with these claims day in, day out so knows what a genuine claim looks like. Overestimating might lead you to the dreaded investigation.

What happens if my R&D Tax claim gets investigated by HMRC?

There is a small chance that the HMRC might want to look deeper into your R&D tax claim. The best way to avoid this is to submit clear and accurate information in the first place. You can ensure this by working with a professional form who has years of experience with research and development tax. We have a 100% success rate with the HMRC for R&D tax claims, so you know that you are in safe hands. We also provide the security blanket of dealing with the HMRC on your behalf in the unlikely event of an investigation.

A small business with turnover of up to £2 million can apply for Advance Assurance, which means you will have the claims for the next 2 years processed automatically without further questions from the HMRC.

If you are investigated, then you should stay calm and check back through your submission to the HMRC. If there are any mistakes on there, then own up and try to rectify things with the tax man.

If you are sure of the claim, then stand your ground. Explain in a firm but polite way what you have done and let the tax man work through it with you. Many might back down in this situation under pressure from the HMRC but there is no need to if you are in the right. You don’t have to think that you are on your own with this. We are here to help, so if you are faced with an investigation get in touch with our expert team and we will help you understand and process what is going on.

I’ve recently had a grant, Does this now affect my R&D Tax Claim?

Many people think that having a grant for a business means they automatically do not qualify for R&D tax credits. That just isn’t the case. It does make the process of making a claim more complicated but doesn’t stop it altogether.

There are often grants available, particularly for innovative businesses, to help build and create new jobs. These are offered by government agencies and are seen as a great way to stimulate growth. And that is what R&D tax relief was set up for too. Getting your hands on cash to grow the business can come in many different forms. The distinct difference between a grant and R&D tax credits is that you receive the cash from a grant up front, and for R&D tax relief after a project and the tax submission have already happened.

If you understand the difference between the two then you can plan ahead and ensure you make the most of these incentives. If a grant is seen as state aid under EU regulations, then this stops that part of the business being eligible for R&D tax credits. You should know the rules here to avoid any complications and avoid making a claim that isn’t valid.

But not all grants are seen as state aid, and in addition you should plan ahead with your business to see what is more effective. The rates on R&D tax relief are quite high and might work better for your business in the long run. Work with Lumo – we understand the system inside out and can help you build your business in the most effective way.

Why would I use you instead of my accountant?

You will already have an accountant. And you will trust the advice they give. And we don’t want to undermine that. We find that accountants fall into one of three categories when it comes to R&D tax credits –

  1. They understand it well and submit great claims for you
  2. They understand it a little and might dabble in a claim
  3. They don’t understand it at all and don’t submit claim

If your accountant falls into one of the last two categories, then we want to speak to you – and we want to speak to your accountant too!

We have an in-depth knowledge of R&D tax credits and how the system works. This means we leave no stone unturned when we are looking at your business and submitting a claim to the HMRC on your behalf. You get the very best service and a team of people who deal only with R&D tax claims every day of the week.

The HMRC are continually changing their definitions and criteria relating to research and development. This means a lot of work for your accountant to stay in touch with the latest developments. In certain industries such as software these changes happen often. This can make the difference between a successful claim and one that is rejected by the tax man. The last thing you want is to put in a lot of hard work only to find that your claim is rejected. We pride ourselves in knowing the latest changes in regulations and making sure we support our clients with their R&D tax relief claims.

Can you work with my current accountant?

Yes, of course we can. If you are happy with your current accountant, then there is no reason to change. We understand what it means to have people in your business that you can trust. Your accountant will have all of the financial data we need to be able to submit a successful claim. We are used to working hand in hand with accountants to submit accurate and successful R&D tax claims. We are an R&D tax specialist, so your accountant can rest assured that we won’t try to ‘poach’ you as a client. We let them get on with their excellent work and we do ours. The last thing we want is for you to walk away from the

The best R&D tax claims are the product of many people working together. We find that someone from the production team gives us the best insight into the challenges faced and how they were overcome. The leadership team help us to understand the overall scope of the project and what it was designed to deliver. And someone from the financial side of the business helps us to get all the facts together for the claim. This is often your accountant.

At Lumo, we work with people to achieve the best outcome for you. This means we will liaise with your accountant and understand your business better. The more knowledge and information we can gather about your business, the more accurate your claim will be.

What are the tax benefits of claiming R&D?

There are significant tax benefits of making a claim for R&D tax relief. For SME’s, you can –

  • Deduct an additional 130% from the qualifying costs for a project with the normal 100% you would deduct for expenditure. This means you will be able to make a 230% deduction in costs.
  • Even for a business that posted a loss in a particular financial year, there is relief of up to 14.5% of the surrenderable loss.

As you can see, this could add up to a large sum of money for the average business and even provides relief for the business that faced tough trading conditions over a tax year.

For a large company, you can –

  • Claim 12% for any projects from 1 January 2018, as well as 11% for any projects up to 31 December 2017.

For a large business, this can be a sizeable sum of money.

R&D tax credits have been in existence for a number of years in the UK, having started as far back as 2001, and the government has committed to them for the foreseeable future. A business that makes R&D tax relief an integral part of their planning will see a large amount of cash return to them over the years.

Corporation Tax can be a dirty word in the business world, so it is refreshing to see money coming back the other way from the tax man. R&D tax credits help business to offset their tax burden in an effective way.

My project failed, can this be part of the R&D claim?

Yes! A failed project doesn’t mean that you are excluded from this government incentive. The very nature of a research and development project is that you don’t know the outcome from the start of the project. If the solution was readily obvious or available to buy off the shelf, then you wouldn’t need to conduct research for your business. So, if you come to the end of a project and find that it just doesn’t work, you have still taken that commercial risk, still conducted R&D and are still eligible for this tax relief.

Many projects fail, this is the nature of business. You set out on a path not knowing what uncertainties lie ahead and what the final outcome might be. There are many products out there that are nothing like the original intention. There are many more failed projects that never saw the light of day. If you have a project like this, then you can still make a claim for the work, time and effort put into this. Don’t let that claim pass you by because you thought it wasn’t eligible.

It is a common misconception that failed R&D projects don’t qualify for R&D tax relief. This couldn’t be further from the truth. If you are unsure how to record the details of a failed project and how to present it to the tax man, then please feel free to get in touch. We have vast experience with this and will help you present it in the right way.

What expenditure can be added as part of the claim?

There are many areas of expenditure that can relate to a qualifying R&D tax claim. It is vitally important to ensure all relevant expenditures are included, just as it is important to leave out all areas that cannot be used. These are as follows –

Staff costs. The people in your business are more often than not the largest expense. The time they spend on research and development projects will often be the largest part of an R&D tax relief claim. If you don’t have a specific R&D department in your business, then you will have to apportion costs accordingly. This can be done by looking at how much of your business is involved in research and development and dividing this by the overall staff cost.

Associated staffing costs. There is more to employing staff then paying their salary. You should also include employer’s National Insurance contributions and pension contributions. These are often missed with an R&D tax claim, so get these costs down and see your claim maximised.

Contractors. If your project needs outside expertise that you don’t already have in your business, then you might have to buy that in from the outside. Contractors that carry out specific work on your R&D project should be included as part of a claim.

Materials. If you are putting together a new product, then there will be materials involved with this. This is the materials for the prototypes, failed tests and samples used to get your product from idea to reality and ready for the market.

Getting all of the relevant costs together for a claim means you make the most of it and don’t lose out. Being efficient in business is often about doing the right things first time.

Is R&D Tax Claim a form of Tax Avoidance?

No, absolutely not. There has been a lot of bad press relating to tax avoidance schemes over the last few years – and quite rightly so! These are schemes that were set up to help people and businesses avoid paying their fair share of tax. These tax avoidance schemes were playing within the rules but didn’t have a great deal of respect for the spirit of the UK tax system. The HMRC has been working hard to close down as many of these tax loopholes as possible. They have been tasked with collecting more tax to help the economy and part of this remit was to look at tax avoidance schemes.

R&D tax relief is a legitimate way for UK business to claim money back directly from the tax man in relation to the research and development activities they have carried out. It is part of government policy and is administered by the HMRC themselves. All of the forms you complete will be submitted to the HMRC and they will return the tax to your business. As such, this is a totally legitimate way to make your business as tax efficient as possible. None of us like to pay tax, particularly where there are genuine ways of making the tax your business pays as efficient as possible.

We would not be involved in a shady scheme that detracts from the good standing we have built up over a number of years. If you have any questions about R&D tax credits them look them up on the government website or speak to one of our professional team.

How do I submit an R&D tax credit claim?

Great question! There is a lot of information here about what R&D tax relief is, but if you want to cut to the chase and submit a claim then you are in the right place. You have two main options when submitting an R&D tax claim –

  1. Use the services of a professional R&D tax expert like Lumo
  2. Go it alone and submit the claim yourself

If you deal with us, then we will find out about your business (this doesn’t take long at all) and then complete all of the relevant forms on your behalf. This allows you to get on with running your business without having to learn all the intricacies of the tax system.

If you feel confident in submitting your own R&D tax claim, then well done you! The next step is to complete the full Company Tx Return form, known as the CT600. This form is where you submit all of the figures that relate to your R&D project over the year. You will need to support this with a summary that explains your project in simple language, in terms of –

  • How it looked for an advance in science and technology
  • It had an uncertain element
  • How these uncertainties were overcome
  • Showing that the solution wasn’t already available or could be easily worked out by a professional in the field

This is all part of a successful claim, so the explanation needs to be submitted and support the facts and figure son the form. If you have any questions about this then get in touch with us.

How long will the process take and when will I get any money?

Another great question – obviously one from someone who wants to know what all of this means to their bottom line. Let’s start with the money. Yes – the whole idea of the process is to get money back into your business. This is how it all happens –

We start by talking to you about your business to identify if you have a valid R&D tax claim. We find that the vast majority of businesses we speak to have a claim of some form or another, so it pays to speak to us. This first meeting only takes around half an hour and can be carried out at your place of work or over the phone.

Once we now you have a valid claim then it takes us a couple of weeks to get the information together and complete the supporting forms for your claim. Some of this depends on how quickly you can get the figures to us. We work with you to ensure that we are sensing accurate information to the HMRC on your behalf.

From there on, it can be as little as 4 to 6 weeks for the money to be back in your business. If you have an upcoming Corporation Tax bill, then this may be in the form of a reduction in this bill. If you have paid recently then the money will arrive in the bank account for your business. It really can be that quick. Submitting the right information first time obviously reduces the need for the HMRC to ask any questions and speeds up the process.

What is an SME for the purpose of an R&D Tax Claim?

There are different definitions for just about everything when it comes to dealing with the HMRC. The normal criteria of an SME might differ from business to business and industry to industry. But none of this matters. It is the HMRC definition that determines whether you can make a claim as an SME.

So, you need to know whether your business fits the criteria for Small and medium sized enterprises (SME) R&D Relief. The criteria are –

  • Fewer than 500 staff in the business
  • Annual turnover of less than €100 million or a balance sheet total under €86 million

Obviously, these figures are based in Euros, so complete the calculation into pounds to ensure you have the right numbers to work with.

Not all businesses are set up and administered simply, so you may need to think about any partnerships or linked companies when deciding if you qualify for Small and medium sized enterprises (SME) R&D Relief.

SME’s can benefit from a 230% deduction for their R&D expenditure as the scheme allows for a further 130% deduction in addition to the 100% that would normally be claimed under expenditure.

The alternative, if you are larger than this, is Research and Development Expenditure Credit and this applies to larger companies. This allow a business to claim between 11% and 12% of their research and development costs, depending on when the project was carried out.

I made a loss, Can I still process an R&D Tax Claim?

This is another common misconception with R&D tax credits. People think that if the business makes a loss then there is no Corporation Tax bill – and subsequently no benefit to claiming R&D tax relief on that Corporation Tax bill.

But the HMRC views loss making companies differently for the purpose of R&D tax relief. They don’t apply the same rules as they would for those that make a profit –

  • If you make a loss in a tax year then you can claim up to 14.5% of the surrenderable loss

For more detail on exactly what a surrenderable loss is and how it might differ from other losses, please speak to our expert team. We have helped businesses benefit from R&D tax credits even when they have made a loss.

As one of the common R&D myths, a company making a loss isn’t excluded from being able to gain from R&D tax credits. It just works in a slightly different way.