Research and development can significantly reduce your tax bill

James Thomas, commercial manager at accountants and business advisors D&T, explains how companies can benefit financially from undertaking research and development projects.

Research and development can significantly reduce your tax bill

No business can afford to stand still. It must evolve, move with the times and be prepared to innovate.

None of what I have just mentioned can be described as ground breaking advice. I’m simply stating the obvious.

But did you realise that if a company undertakes research and development (R&D) work, it can sometimes qualify for tax relief.

This information will be music to the ears of many a franchisor currently attempting to devise and create new products or services.

And it will be especially heart-warming for those planning a research and development project which is expected to be either costly or time-consuming, or both.

It is also worth noting that tax relief can even be claimed on unsuccessful projects.

According to my colleague Richard McDermott, who is a specialist tax manager at D&T, tax breaks exist for businesses which undertake research and development work in certain sectors.

Richard explained: “R&D tax relief is designed to support companies that work on innovative projects in science and technology. It can be claimed by companies that seek to research, develop and create an improvement in their field.” 

Now here’s the technical bit: In order to claim R&D Corporation Tax relief, your franchise’s project needs to satisfy certain criteria – and I’ll discuss these as soon as I explain how it all works financially.

If your project plans satisfy HMRC, R&D qualifies for an additional 130% of qualifying costs to be claimed for tax purposes.  So, for a company qualifying for £100k worth of R&D, there are additional qualifying costs of £130k, taking the total to £230k. This is a sizeable amount, as it can reduce corporation tax liability by £24.7k (£130k x 19%).

Alternatively, if the company registers a loss, a repayable R&D tax credit of 14.5% can be claimed, resulting in a welcome cash boost for the business.

Richard and his team have just completed an R&D claim for a client, which should result in a corporation tax repayment of £63k. This is just one example which highlights how valuable tax breaks can be for limited companies that undertake R&D work.

So, what are the criteria that need to be met in order to claim one of these valuable tax breaks?  To quote HMRC: “The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology.

“It cannot be an advance within a social science, like economics or a theoretical field like pure maths. The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D. 

“Your project may research or develop a new process, product or service, or improve on an existing one.”

Thus, any improvement in the field of science or technology, which extends the overall knowledge of that given field, could earn the business a hefty rebate. But beware: It can’t be a technology which already exists, even though it might be being used for the first time in your particular sphere of business.

It will, of course, be necessary for the company to demonstrate the full extent of the scientific or technological uncertainties they faced, and show evidence of how these problems were overcome. 

Yet, according to HMRC: “This can be a simple description of the successes and failures you had during the project.” More detailed information about this topic can be found on the gov.uk website.

However, dealing with such specific rules and regulations can be somewhat daunting. So this is where we come in, as accountants and business advisors.

We have years of experience and expertise in understanding tax rules, and can act as your confidante and jargon buster. 

So speak to us first before undertaking any type of R&D project. We will illustrate the best way to chronicle all your hard work correctly and efficiently, so you can prove to HRMC that your company qualifies for a tax break. 

At D&T we are always happy to discuss ideas and projects, and offer guidance to franchisors and other companies about the world of tax and business planning. 

For further information please visit: https:/www.team-dt.com/

In recognition of their
work, Swindon-based D&T won the award for Innovation & Development at
last year’s British Franchise Association conference
. 

ABOUT THE AUTHOR
James Thomas QFP
James Thomas QFP
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