How to claim R&D (Research and Development) tax credits

Building an innovative business in the UK? Here's everything we know about claiming R&D tax credits from the UK government

a white piggy bank with coins going into it on a green background

Like almost all growing companies we aim to save what we can where we can, without cutting corners and whilst still moving towards making a better product and growing our business.

One way that you can relieve some financial pressure on your company (in the UK) is through Research and Development tax credits. Many other countries also have an R&D tax scheme so check to see what your options are if you are a non-UK based company!

This initiative was created to encourage more companies to spend money on R&D. In this case, R&D is defined as an advancement in knowledge or technology in a scientific or technological field.

Both SMEs and large corporations are eligible for these tax credits.

I’m listening, what next?

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In the UK, R&D tax credits allow you to claim back some of the tax you pay on employee earnings when their time has been spent carrying out research and development work. HMRC provides reference manuals CIRD80000, and advice pages providing information about R&D, but how do you make a claim? What should the claim look like, and how should it be structured?

In this post, we would like to share some of our experience of making R&D claims over the years.

There is very little advice out there about what to write about in your claim. So, we hope this post will be helpful to anyone putting together an R&D claim who needs a little inspiration or guidance.

Structure of the claim

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We’re going to start by outlining the sections we should include in the claim. An R&D claim as a whole actually consists of a numbers part, which calculates the amount of credit due back to you, and a report, where you write about the R&D activity that happened.

We are going to look at the report first.

Sections to include in your report

When HMRC read your report, they want to see how and why the work your employees undertook can be considered as research and development work.

For work to be considered R&D, it needs to have resulted in a technical advancement, and you need to show that you faced and overcame uncertainties in the pursuit of this advancement.

Don’t worry too much about the particulars of this right now. It will become more apparent as you work through your report. Just assume that HMRC knows nothing about your company, your industry, or what you do.

This all needs to be explained in the report, in addition to detailing the work that was done.

Let’s list out all the sections here:

  1. Overview of the company and area of research
  2. Company background
  3. Summary of project timeline and development approach
  4. R&D projects: Project 1, Project 2, Project 3…
  5. Key people
  6. Terminology reference
  7. Method of data collection

As you can see, we start the report by explaining a little bit about our company and what we do, then we dive into the specifics of each project.

We also include a section about the people involved in the R&D work, to highlight why they have the skills and experience necessary to carry out thought leading work.

For HMRC’s benefit, we also include a terminology reference to demystify any technical terms or jargon.

Finally, we explain a little bit about the worker time we are claiming for and how we have arrived at the calculation.

Now that we’ve got an outline in mind, let’s start by gathering the information we need to begin the claim.

R&D Prep

lots of green and white files all over the floor

Before you can start your write-up, you will need to figure out what out of this year’s work counts as R&D.

This is an information gathering exercise as it is unlikely you were the only person involved in the R&D work and will need to get input from others to fully describe the activities that went on.

It’s a great opportunity to learn about all the work that your team have been doing so that you have as much information as possible to hand when writing your report.

First, gather all the information

Anything and everything is relevant here. We tend to go through a scatter-gather thought process in order to identify the core projects we will talk about in the claim.

It starts by interviewing your team about all the things they worked on, so we can get everything out there on the table. The most important part of this process is just getting everything down so we can see what work was done. Even if it feels a bit exhaustive – once we have everything noted down it is easier to start identifying themes and defining our projects.

Ask individuals in your team to go off and think about everything they worked on during the year and write it down in a list. Then, with each individual, or team, or department – whatever you feel is best – set up a meeting and write everything up on a whiteboard.

Secondly, identify your projects

Getting the scope of projects right is really important. What might be seen as a technological advancement for your company or product, might not necessarily qualify as R&D for tax purposes. R&D for tax purposes should focus on the specific advancement in knowledge or technology where uncertainty has been overcome.

The easy mistake to make here is to write about the merits of new product features or capabilities, as that would have probably been the focus of your team. However, this tends to concentrate on the commercial benefits of the work rather than advancements that qualify as R&D for tax relief.

Instead, have a think about the technological advancements that have constituted the making of the product or features, such as new algorithms, protocols, systems etc. What can be considered a technical advancement in your field? Is it something that other companies might already have but is not yet common knowledge or easy to replicate? Is it something novel that you have done in a unique way? This could all be R&D. It’s important to focus on the specific advancement being made, and that should be the main focus of your writing.

Section walkthrough

magnifying glasses showing the company and research

Let’s go through each section one by one and get clear on what needs to go in each one.

Overview of company and area of research

To start off, HMRC needs to be able to place your company.

They will be seeing lots of these claims each day, so when yours reaches their desk, they are not going to know whether you are a tech business, or a farming business, or a cupcake shop. So it’s best to start with a short intro about your company, what you do, and the industry you are in.

Company background

Here we can include a little more information about the company and its history. It is useful to include this to show HMRC how you play an active part in your industry and that you influence it with your work.

Therefore, it is helpful to include some background about your story – when did you make a splash? What are your products, mission, reasons to be? If you had a hit product, mention that, why was it good, who liked using it, how does it help them. What is your grand vision?

This is also a great place to list out any awards and industry recognition you have received. News articles, blog posts, influencer tweets mentioning you, as well as awards and certifications are all good here, as it demonstrates how your company is having an impact.

We usually include these under a subheading in list form, including any relevant links to the original content.

Summary of project timeline and development approach

In this section, we begin to talk about the sort of work your team does. While this guide could apply to a company of any kind, we are in the business of building software ourselves, so we will use that as an example.

Begin with these questions: How do you go about your R&D work? Why is this work R&D?

For software, we can talk about how we work with new and emerging software and platforms all the time, adopting new technologies, and building novel solutions with them.

This kind of work is riddled with uncertainties everywhere – and this is a key thing we need to discuss in the report.

Think of the things you asked yourself during these projects – is it even possible? Will it scale? Will it be cost-effective enough to be feasible? What needs to be solved along the way?

At this point in the claim you only need to write a high-level overview – we’ll get onto explaining the actual uncertainties a bit later when we talk about each project in detail. For now, just help HMRC understand your development process, what was involved, and how your company went about it.

Don’t forget to build in some indication of your project timeline – i.e. when each of your projects was worked on and how long for. Some of your projects may have been one-offs, or they might have all been running throughout the year. Shed some light on this here.

Bonus points for including a mention about your contributions back to the community/industry you are in. In the case of software, this is a great place to mention any open source projects or contributions (blog posts, articles, documentation) you have made during the year. You can list these out along with any relevant links.

R&D Projects

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Now we get onto the projects themselves.

It is important that we highlight the technical advancement as that will be the focus of your writing on each project. Include the following headings:

  • a. Project Background
  • b. Technical Advancement
  • c. Project Activity
  • d. Project Timeline

For the project background, provide some backstory about the project. Why is it important, why you did it, what the goals were. What was it exactly? Was it an app? A new platform? Internal tooling? An advancement in AI techniques? Explain in plain English – try to avoid jargon, and deconstruct technical terms.

Next, under the technical advancement(s) header, make it abundantly clear what technical advancements were achieved. You can list them out in bullets to frame these at the top of each project.

Here’s what each project section could look like:

Project 1. Something We Did

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a. Project Background

Paragraph explaining the Thing. Why it matters.

b. Technical Advancement(s)

Working on Thing produced the following advancements:

– Advancement 1.
– Advancement 2.
– Advancement 3.

Include 1 or more advancements achieved. Then we go onto explaining the detail.

c. Project Activity

The purpose of this section is to give information a sense of the uncertainties you faced, why you have the knowledge and expertise to overcome those uncertainties and produce the advancement.

Tell the story of your work on this project, any problems you encountered, the work you did to resolve the problems. Failed attempts at solving the problems still count, as this is still work you did to try to resolve uncertainty.

It should be clear from your writing what aspects of the project were unclear and what needed work to resolve. Perhaps you had to iterate and test out a process before you landed on something that worked well enough / was efficient enough / effective enough. Include some brief discussion about this to show how the project played out.

Don’t be afraid to include some light technical language or terminology here so long as it is clear and any terms are explained/defined (you can do this in the terminology reference).

An extra question to bear in mind:

Why would this not otherwise be readily deducible by a competent professional working in the field?

You should already have been asking yourself this question during the process of defining your R&D projects. It is what distinguishes a unique project where a genuine advancement was made, from say something a skilled contractor could achieve if they were hired for the project.

For example, if your team produced a faster/more efficient/more accurate algorithm drawing from experience, knowledge and ability that only your team has, this would be distinguishable R&D compared to an API you could hire an experienced developer to build.

This is your opportunity to explain why your company is the place where this advancement was born, and how it isn’t just another thing any company could build.

d. Project Timeline

Include a brief description of who worked on the project, and when (e.g. AB and CD carried out the engineering on this project with FG on project management. The project ran throughout May-July 2017.)

HMRC need to see how your staff’s time was spent during the R&D year, to make sure it tallies up with how much of their time you are claiming for in the credit calculation.

Key People

heads showing key people in an R&D claim

Here we showcase your team’s skills and experience.

Include a brief bio of each team member involved in the R&D work. It should be said why they could be regarded as leading professionals in their field. Include any merits, relevant experience and achievements. The better your team looks the more plausible it is that they produced genuinely groundbreaking work.

Example:

Mr Blobby

Mr Blobby trained in Musical Theatre and Performing Arts at RADA and spent 3 years at the West End musical Les Miserables as an understudy to the leading role Jean Valjon. He later became interested in Javascript and went on to author several high-profile Javascript frameworks including Blobbeeee.js and the Blobbable React components library.

Terminology Reference

jargon for beginners book for an R&D claim

A rundown of any technical terms used in your report with a description of what they mean.

E.g.

CMS – Content Management System. A system hosting content online that authors and editors can use to publish content and administer their website.

Method of Data Collection

lots of circles linked by lines showing collecting data for R&D claim

In this section, we need to make it clear that we are only making claims for time spent on actual R&D activities and not for administrative tasks or anything unrelated to the R&D projects in question.

It is a justification for the figures you have arrived at in your numbers part and reassures HMRC that you are not trying to sneak in a claim for any time outside of work conducive to your R&D projects.

The numbers part

numbers moving from disorder to organised from left to right

In the report, you can be a bit creative in walking through your projects and what you do.

But the numbers section of the claim is quite mechanical.

However, it is critical as it is how you calculate how much money you are due back as a tax credit.

The information out there (or lack of) is often mixed with accountancy speak and seems to massively overcomplicate what isn’t actually a terribly challenging calculation, once we know what goes into it.

So, here we go.

Get your payroll figures

We’re going to need all of the payroll figures throughout your tax year. So that’s all payments to each employee for each month of the year.

Quantify your employee time

Next, we need to tally up, month on month, how much of each employee’s time was spent on R&D activities. List out all your employees and for each month, note down a percentage of how much of their time was spent on R&D work.

For a software company, it is reasonable to expect a developer working on R&D projects to be spending most of their time on related R&D activity. 80-90% would be acceptable here, provided that much time was actually spent on the project work. Make sure you adjust the figures accordingly.

For other roles such as project managers and designers, you can still claim for their time but you will need to realistically adjust the proportion of time that counts. For example, a designer in your company may be spending 50% of their time on prototypes for your R&D project, and the rest of their time making images and designs for other purposes. Jot down proportional figures for these.

Once you have the percentage contribution for each month, you can calculate the total percentage time each employee spent on R&D for the year, and calculate the proportion of their wage you will claim for.

For the SME scheme, a profit making company can choose to have their tax bill reduced by enhancing their costs with the R&D scheme.

Enhancing costs is a strange part of the R&D process and the exact figures change each year. Right now, your qualifying costs are enhanced by 130%, with this resulting figure being the maximum surrenderable loss (the amount of loss you surrender if asking for tax credits for that year).

This calculation is important because the total amount you claim back has to 14.5% of the smaller number from a. this enhanced cost, or b. your company’s trading loss for the year.

If you are reading this in the future (hello!) make sure to check what this year’s enhancement and claim percentages are to get this calculation right.

For example:

100k spent on qualifying costs (staff wages)
10k profit
130k additional cost due to R&D enhancement (100k * 230%) = 230k R&D enhanced cost

Enhanced cost + profit = -130k + 10k = -120k “loss”

A company can choose to carry the loss or surrender the loss for a payable tax credit.

If choosing payable tax credit:
120k loss * 14.5% = 17.4k credit

In this case, the company gets back 17.4k of 100k, or 17.4% of their original R&D spend as cash from the tax credit.

The calculation for a loss-making company isn’t too dissimilar:

100k spent on qualifying costs (staff wages)
50k loss
130k additional cost due to R&D enhancement (100k * 230%) = 230k R&D enhanced cost

Enhanced cost + loss = 130k + 50k = 180k “loss”

The company can surrender the loss for a payable tax credit:
180k loss * 14.5% = 26.1k credit

In this case, the company gets back 26.1k/100k = 26.1% of their original R&D spend as cash from the tax credit.

If the numbers work out, it is possible to claim back up to 33% of original R&D spend as cash.

Other tips

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– If this is your first time doing an R&D claim, it can be helpful to have an agency do it for you first time around, to guide you through the process. They usually take a percentage of your rebate if your claim is successful, so you may not wish to do this every year, but for the first time, it can be helpful.

– Get your accountants to check your calculation. The numbers part can vary depending on your business and whether you are profit or loss-making, and HMRC can change the rules year on year. So it’s useful to check with someone in the know to make sure everything adds up.

– If you worked on something that wasn’t completed or was never released, it doesn’t mean it doesn’t qualify for R&D. Anything you work on that is an effort to overcome uncertainty and seek an advancement in technology or knowledge counts. So think about projects you abandoned, prototypes you built, or experiments you worked on, as things to include in your projects as well. This can also include internal tools or things that are intended just for your company.

Helpful Links

HMRC Guidance

The official and very important resource for the most up to date guidelines and regulations for anything R&D related.

Forrest Brown

Another great explanation of R&D tax credits and a handy video!

We hope your claim is successful and that this advice has helped you to navigate through what is quite a tricky process. Take it step by step and make sure to check with HMRC for the most up to date information.

Good luck with your claim!

Note: This is not financial or legal advice. Conduct your own due diligence and consult your accountant or a financial advisor before any action is taken.

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