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Research and development (R&D) tax credits

Do you run a company which develops new products, services or processes?

Then you may qualify for R&D tax credits which will reduce your corporation tax bill, or secure a tax repayment.  This could be true even if an advisor, or someone from HMRC, told you that your business did not qualify for R&D tax credits.

Since 1 April 2012 a company only needs to invest in some form of R&D to qualify.  Most companies involved in engineering, or manufacturing new products, will have qualifying R&D.  Some types of R&D are easily overlooked – for example one Oaktree claim which saved a client £10,000 in corporation tax was for a brewery which develops new beers.

The Oaktree process which backs up all R&D claims has three key elements:

  • Technical justification.
  • Qualifying costs breakdown.
  • Corporation tax return with enhanced R&D cost adjustment and attachment.

Technical justification

This is written in layman’s terms – most HMRC staff reading this will not be technical experts in engineering or beer brewing.  It sets out the scientific and technical uncertainties which were encountered in developing the product, process or service involved.  Work which contributed to resolving those uncertainties is qualifying R&D.

Qualifying costs breakdown

This sets out the costs involved in the R&D work which are going to be claimed by an adjustment to the corporation tax return.  These costs may include direct labour, 65% of sub-contractor costs, and “consumables”. The consumables heading can cover a wide range of external costs such as raw materials, training, licences, utility costs and software.

Corporation tax return

There are special boxes in the corporation tax return in which to include the R&D costs and an enhancement factor, usually 130%.  It is this enhancement which generates the reduction in corporation tax liability.  As well as submitting the corporation tax return, Oaktree attaches the R&D report setting out the technical justification for the claim and how the qualifying costs are calculated.