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Before you ask – “Why are you talking to me about Research and Development credits? I don’t even have an R&D Department!” – read on.
Unknown to many, the Research and Development (R&D) tax relief is not just for traditional research and development. This means many businesses can benefit, but instead lose out.
You could be a recruitment or security agency, or perhaps your business provides specialised cleaning services. Believe it or not, R&D relief may offer valuable credits to your business and reduce corporation tax to help you fund your business.
Understanding Research and Development Tax Relief
R&D involves creating innovative methods, products, systems and processes. It focuses on discovering new knowledge and enhancing existing ideas. R&D tax credits provide significant tax savings for businesses who take existing knowledge or capabilities and adapt or renew them, to create something new or more advanced.
In a nutshell, to qualify for this relief, you will need to have:
- A project or activity (whether you are directly involved or not)
- In the science and/or technology field
- Which either creates something different or improves on something already existing.
The R&D tax relief allows organisations to deduct a percentage of their qualifying costs on top of the usual deduction from their annual profit. This results in a reduction in their corporation tax liability or allows them to claim a tax credit based on their qualifying expenses.
Defining Science and Technology
Science is defined as the systematic study of the nature and behaviour of the physical and material universe. In business terms, this relates to science being a methodical approach to understanding and analysing how various elements of the physical world and material processes work. Technology on the other hand, uses what science tells us to create tools to solve everyday problems.
These definitions generally connect to a very wide variety of projects ranging from biotech research to an architectural firm tasked with achieving a specific thermal performance standard in a building using new, sustainable materials.
More often than not, those directly involved in the advancement of science and technology are aware and leverage this relief for the expenses involved in cutting edge projects. However, those working at arm’s length are less likely to look into their activities, thereby overlooking the tax benefits available to them.
But please note you cannot claim the tax relief in the arts, humanities or social sciences fields, including economics.
Qualifying Indirect Activities
The scope of R&D extends beyond direct innovation and creation to the activities which form part of the project indirectly, even if they don’t necessarily directly contribute to the resolution of scientific or technological uncertainty.
For example:
ABC Ltd, a UK based limited company with restaurants around London, undertakes a project to develop food packaging that is biodegradable and uses nanites to effectively preserve the food to last 7 days longer.
For purposes of the project, it contracts a third party to recruit the team needed to perfect the nanite technology for the project and engages the services of a cleaning team which specifically cares for high technological equipment to ensure optimum results monthly.
Although not immediately apparent, the expenses incurred by ABC Ltd for recruiting technical staff and the specialised cleaning services would be regarded as an indirect activity in the R&D claim process.
To better understand how R&D tax relief could benefit your business, consider booking a free 15-minute conversation with our tax team. We are here to help you unlock some potentially great savings.