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What is R&D Tax Relief?

To reward UK companies for investing in innovation, the UK Government has created the research and development (R&D) tax credit.

The R&D tax credit is designed to incentivise businesses to increase the level of research and development activities they carry out by providing them with a valuable cash rebate (usually paid out after the end of their company’s financial year). 

What is research and development?

Generally speaking, R&D refers to any innovative activities that a business undertakes in order to develop new products or services, or alternatively, improve existing ones. 

R&D is often the first stage in the development process, helping businesses ensure that any new products and/or services they bring to the market have the very highest chances of success. 

In the context of the R&D tax relief, HMRC states that in order to qualify the activity must be part of a specific project to make an advance in science or technology. The activity should at least try to create an overall advance in knowledge or capability that resolves a current uncertainty.

What activities can qualify as R&D expenditure? 

Whilst we highly recommend you seek advice from a qualified tax advisor to look at your specific business expenditure before submitting any tax relief claim, here are a number of activities that could potentially be identified as R&D (along with brief explanations):

  • Routine analysis – testing to discover potential weaknesses, strengths or opportunities that solve an uncertainty 
  • Research – discovering the right materials, solutions or requirements for new products or improvements
  • New process creation – developing new systems that boost innovation within the field
  • Existing process improvements – improving current processes that create an advance in science/technology 
  • Product creation – developing and testing new products and prototypes to bring to market 
  • Product improvements – improving current products to create an advance 
  • Service creation – the creation of new services that complement your existing capabilities 
  • Service improvements – improving existing capabilities 
  • Testing – testing and analysing products or services to improve and adapt
  • Technological advances – development of technological advances that solve uncertainties within the current field

To qualify for R&D tax credit expenditure, the research and development activity must seek to resolve specific uncertainties within the field that the business operates.

HMRC will review the nature of any such advances in knowledge or understanding your project may have achieved, the problems your company faced, how these problems were overcome, and why the information to address the initial problem was not readily available prior to the R&D.

What costs can qualify?

The costs that can be included within your R&D tax relief application could include: 

  • Project management fees – including R&D planning, analysis of results and more
  • Staffing costs – the costs involved with staff that are working on the project
  • Outsourced/external workers – any workers that belong outside your organisation can still be claimed as costs 
  • Software – the software costs within the project 
  • Materials – any costs that surround consumables, new materials, or specific items that are required within the project 
  • Utilities – the fuel behind the project, including water, gas and electricity bills

In many circumstances, staffing costs are the largest category of qualifying expenditure, including all salaries, bonuses, National Insurance, pension contributions and more. Where individuals have only spent a small segment of time working on R&D activities, the appropriate amount of tax relief could potentially still be claimed as an apportionment of their time spent.

Care should be taken, though, as not all expenditure within an R&D project will necessarily qualify. For example, expenditure for capital equipment cannot be claimed, including new machinery and tools that have been used within the R&D project. 

What industries can apply for R&D tax credits?

Although many are quick to think that research and development only takes place in technological companies, R&D can take place in any sector that is looking to make an advance in science or technology.

Of course, certain industries rely more heavily on R&D than others. For example, a pharmaceutical company would be much more likely to commit resources to R&D than, say, a retail store. Similarly, a technology company such as Apple would be more involved in R&D than a high-end restaurant.

Nonetheless, if structured correctly, businesses from many more sectors can potentially tailor their R&D activities to increase the chances of it qualifying for the appropriate tax relief.

How do R&D tax credits work? 

Any applicable R&D tax relief can be claimed as part of the usual process of submitting a company’s Corporation Tax Return (or CT600) after then end of your financial year end. Claims can also be made for a period of up to two years following the end of the accounting period the claim relates to.

Once HMRC has agreed the claim, the process is triggered to release of designated funds back into the company’s business account. The period of time this takes can be influenced by a number of factors and can often turn into a lengthy process that requires regular attention. 

Buzz makes tax credits flexible! 

Clearly, the R&D tax relief can potentially provide your business with a valuable cash boost. However, the rigid structure of making a claim can often mean that it takes longer than you would like to actually receive that cash into your bank account.

This is when Buzz Capital can help.

If you are looking for quick and easy access to funds due from an R&D tax credit claim, Buzz Capital can provide a cash advance to your business in just a matter of days.

Interested? Then give us a buzz.

Our team of financial experts are on hand to provide you with a straightforward advance that simply uses your future R&D tax relief claim as the primary collateral.

Just contact a friendly member of our team today if you want to learn more.