Tax Relief and Refunds Against Research and Development (R&D) Costs

Image of Research & Development Costs

January 26, 2021

If your business invests in any kind of scientific, technological or, in some circumstances, manufacturing research and development, you may be eligible for enhanced tax relief or a refund from HMRC.

One of the popular misconceptions to put to one side is that this is all about scientists in white coats busying themselves in labs. Yes, they can often be eligible, but government support for research and development stretches much further and wider.

Let’s consider a couple of scenarios.

Your business turns a profit. Within your operating costs there is £10k’s worth of research and development expenditure (according to HMRC definitions). You will be eligible for an additional 130% tax relief against that expense. Effectively the £10k cost becomes £23k in the eyes of HMRC. The extra £13k is also eligible for tax relief at 19%. This equates to £2470. This means you will get an additional nearly 25% back in tax relief against those research and development costs. Scale that figure up to £20k, £50k or whatever and the numbers get serious.

Your business doesn’t return a profit, so you won’t be paying any tax or getting any tax relief. However, you have spent significantly on eligible research and development. You can apply to get 14.5% of those costs back. You effectively surrender the losses relating to the R&D to the government and they will refund the money (via an actual payment, not a credit).

Your business doesn’t need to be based around a science lab to be eligible. Essentially, if you’re developing or making an advance in science or technology, no one else is doing it and you’re solving a unique problem you may well be eligible for.

One recent example I know of is a company that makes a fairly basic, but widely used manufacturing component. They redesigned their production facility to improve efficiencies. The company received significant R&D tax relief – in the six figures. I know an app developer – no sales or revenue yet from the app (it’s still in development) but they’ll be due a tax refund of around £20k.

In Germany, 55% of companies claim the equivalent relief. Here, it’s about 35% of businesses. The rules are very similar. I can’t imagine that Germany, the innovative county that it is, is that far ahead of the UK. Companies here must be under-claiming.

There are various terms and conditions that apply in order to get a tax credit or refund against R&D expenditure. If you think your business might be eligible or simply want to learn more, please get in touch and we can guide you through it.

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