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R & D Tax Claims

for Companies

R & D Tax Claims

For companies

What Qualifies as R&D?

HMRC’s definition of what qualifying R&D actually is:

“R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties”

The advance has to extend the overall knowledge or capability in the field of science or technology and not just the company’s own state of knowledge or capability.

Although this sounds complex, there is qualifying R&D undertaken in most companies without them ever realising.


How the claim works

The company’s R&D expenditure is multiplied by 130% and deducted from existing taxable income, which is calculated through the Tax Computation.

In profit making companies, this creates a lower profit level, meaning a revised lower Corporation Tax (CT) liability. Companies can earn back as much as 24-33% of their total investment into R&D.

There are cases where a CT liability will be reduced rather than a refund owed as the company may not have paid any CT in the first place.

Example of a profit-making company

£100,000 of qualifying R&D expenditure

X 130% enhancement (£130,000) – tax saving on £130,000 of profits

X 19% CT - £24,700 as a tax refund or reduced tax liability

Example of a loss-making company

Making losses of £30,000

£100,000 of qualifying R&D expenditure

X 130% enhancement (£130,000)

Total losses = £160,000 230% x £100,000 = £230,000

The lower of total losses and 230% of R&D expenditure is the amount we’re allowed to sacrifice for 14.5%.

£160,000 x 14.5% = £23,200


R&D Claim Criteria

Companies wishing to submit a claim have to have developed a product, process or service. Usually companies are looking to enhance their own capability through development, without realising that the final result can often be considered as advancing knowledge/capability across the industry that they work in.

Within a technical report, to show that a company’s R&D qualifies under HMRC’s guidelines we have to answer the following 4 questions:

  1. What is the scientific or technological advance sought?
  2. What scientific or technological uncertainties were encountered?
  3. How and when the uncertainties were overcome?
  4. Why the knowledge being sought was not readily deducible by competent professionals?

What costs can be claimed

  • Direct Staff Costs
  • Externally provided workers (EPWs)
  • Subcontracted R&D
  • R&D Consumables
  • Software
  • Prototypes

Areas of R&D to look for

  • Developing products to be lighter, cheaper or faster to produce;
  • Building and testing prototypes;
  • Increasing strength or durability;
  • Designing, developing and testing new products;
  • Adapting existing technology or materials for a new purpose;
  • Working with new materials;
  • Developing bespoke software and services;
  • Adapting existing processes due to legislation, environmental or health and safety regulations;
  • Reducing waste sent to landfill and other recycling initiatives;
  • Cosmetics product development –enhancing capability of skin care products;

A huge area of R&D that most companies are likely undertaking is in internal IT systems used for their operations. A good example of this is recruitment companies. They all use Customer Relationship Management software systems, and although they use a system readily available on the market, they have it modified by the supplier to meet their bespoke requirements.

As the system is modified, it shows HMRC that they haven’t been able to go straight to the market and buy an off-the-shelf system that fits straight into operations. They therefore modify the system, advancing its functionality.