R&D Tax Credits Bordon Hampshire → R&D Tax Credits UK

In New Hampshire, R&D tax credits are a valuable incentive for businesses to invest in research and development activities. These credits are designed to offset business tax liabilities based on qualified research and development expenditures made within the state. The New Hampshire R&D Tax Credit allows businesses to claim a credit against their business profits tax (BPT) and business enterprise tax (BET), with the credit amount being the lesser of 10% of the qualified manufacturing research and development expenditures or $50,000.

To qualify, businesses must incur wages for services rendered in New Hampshire that meet the criteria under section 41 of the Internal Revenue Code. Eligible entities include C-Corporations, S-Corporations, LLCs, and partnerships. The application for the credit must be submitted using Form DP-165 and accompanied by Federal Form 6765, with a deadline of June 30 following the tax year in which the research and development occurred. Any unused portion of the credit can be carried forward for up to 5 years, providing a significant financial benefit to businesses by reducing their tax liability and boosting cash flow.

How Do R&D Tax Credits Benefit Businesses?

R&D tax credits significantly benefit businesses by reducing their tax liability and boosting cash flow, allowing them to invest more in innovation and growth. These credits provide a dollar-for-dollar reduction in tax liability, which can be particularly crucial for small and midsize firms.

Financial Advantages

R&D tax credits offer substantial financial benefits to businesses. By claiming these credits, companies can receive 5-10 cents for every dollar spent on qualified R&D expenses, which can amount to $5,000 to $10,000 on $100,000 in research and development costs.

For small businesses, the R&D tax credit can be used to offset up to £250,000 (or up to £500,000 starting in 2023) in payroll taxes, providing an immediate cash infusion. This is especially beneficial for startups that are not yet profitable, as it allows them to use the credit against their payroll tax liabilities rather than waiting until they are profitable to use it against income taxes.

Additionally, any unused portions of the R&D tax credit can be carried forward for up to 20 years, allowing businesses to use the credit to pay future taxes.

Competitive Edge in Innovation

The R&D tax credit gives businesses a competitive edge in innovation by incentivizing them to invest in research and development activities. This credit encourages companies to engage in technological advancements, develop new or improved products, processes, and software, and eliminate uncertainties in their research endeavors.

By providing financial support for these activities, the R&D tax credit enables businesses to stay ahead in their respective industries. It also allows them to allocate more resources towards hiring engineers, scientists, and designers, and towards creating, developing, or manufacturing innovative products.

This support is not limited to high-tech industries; businesses in manufacturing, agriculture, construction, and other sectors can also qualify if they engage in qualifying research activities, thereby fostering innovation across a wide range of industries.

Which Industries Commonly Claim R&D Tax Credits?

Companies across various sectors can benefit from R&D tax credits, but some industries are more prevalent in claiming these credits due to the nature of their work. Here are some of the key sectors that frequently claim R&D tax credits.

Technology Sector

The technology sector, particularly software development, is a significant beneficiary of R&D tax credits. Companies in this sector often engage in activities such as developing new software tools, improving data capture and transmission methods, and overcoming technical challenges in integrating new software into existing systems.

Manufacturing

Manufacturing is the largest sector claiming R&D tax credits, with a substantial number of claims submitted annually. This sector involves continuous innovation, such as developing new products, improving existing materials and processes, and adapting to regulatory changes. Activities like product development using computer-aided tools and developing second-generation products are common qualifying projects.

Life Sciences

The life sciences sector, including healthcare and medical & pharmaceutical industries, heavily relies on R&D. Companies in this sector focus on improving services, products, and treatments, which often involves developing software solutions for electronic medical records, testing new product prototypes, and reducing side effects of pharmaceuticals.

Others

Other industries that frequently claim R&D tax credits include oil and gas, farming and agriculture, and food and drink. In the oil and gas sector, companies invest in R&D to develop new technologies and improve existing ones due to the decreasing availability of traditional energy sources. Farming and agriculture involve developing new machinery and processes to enhance efficiency and reduce waste. The food and drink industry often innovates by changing ingredients, testing new products, and marketing them.

What Qualifies as R&D Under UK Tax Law?

To qualify as research and development (R&D) under UK tax law, your project must seek to make an advance in science or technology and overcome scientific or technological uncertainty. This advance must benefit the field overall, not just your business.

Qualifying Activities

Qualifying R&D activities include those that aim to develop new or improved products, processes, materials, services, or devices. These activities must involve overcoming scientific or technological uncertainties that are not readily deducible by a competent professional in the field. Examples include developing new software processes, improving existing products, and creating innovative methods for capturing, transmitting, manipulating, and protecting data.

For instance, if your company is working on a project to develop a new process for extracting specific data that your software experts cannot easily achieve, this could qualify for R&D tax relief. Similarly, projects that extend the functionality of application software, develop novel data management techniques, or integrate hardware and software platforms can also be eligible.

Excluded Activities

Activities that do not qualify for R&D tax relief include those that do not advance science or technology, such as projects in the social sciences, arts, humanities, or economics. Additionally, routine or periodic changes to existing products or processes, or the application of existing technologies in a straightforward manner, do not qualify. For example, developing a new website without any innovative technological advancements would not be eligible for R&D tax credits.

Projects that do not involve overcoming scientific or technological uncertainties, such as those where the outcome is readily achievable by a competent professional in the field, are also excluded. This ensures that only genuinely innovative and challenging projects are rewarded under the R&D tax relief scheme.

How Are R&D Tax Credits Calculated?

To calculate R&D tax credits, you need to determine which scheme your business qualifies for and then apply the specific rates and rules associated with that scheme. The two main schemes are the SME R&D tax credit scheme and the Research and Development Expenditure Credit (RDEC) scheme.

SME Scheme

For small and medium-sized enterprises (SMEs), the SME R&D tax credit scheme allows you to claim a significant portion of your qualifying R&D expenditure. As of April 1, 2023, the enhancement rate for SMEs has been reduced from 130% to 86% of the qualifying R&D expenditure.

If your company is profitable, you can deduct an amount equal to 86% of your qualifying R&D spending from your taxable profits. For example, if you spent £100,000 on R&D, you would deduct £86,000 (86% of £100,000) from your taxable profits, resulting in a corporation tax saving of £21.50 per £100 spent, assuming a 25% corporation tax rate.
If your company is loss-making, you can surrender the loss and claim a tax credit. For expenditure after April 1, 2023, you can claim 186% of the qualifying R&D expenditure, and then apply a 10% credit rate, resulting in £18.60 for every £100 spent on R&D.

RDEC Scheme

The RDEC scheme is primarily for larger companies or those that cannot use the SME scheme. As of April 1, 2023, the RDEC rate has increased from 13% to 20% of the qualifying R&D expenditure.

For every £100 you spend on eligible R&D activity, you will receive £20 R&D Expenditure Credit. This credit is taxable as trading income, so the net benefit after tax would be £15.
The RDEC is added to your company’s taxable profit but reduces your corporation tax payable. For example, if you incurred £300,000 on R&D, you would receive a £60,000 RDEC, which would reduce your corporation tax liability accordingly.

What Are the Recent Changes to UK R&D Tax Credits?

The recent changes to UK R&D tax credits involve significant reforms aimed at simplifying the system, reducing errors and fraud, and encouraging more investment in research and development. These changes include the merger of the SME and RDEC schemes into a single scheme, along with new rates and eligibility criteria.

Policy Updates

Merged Scheme: The SME and RDEC schemes have been merged into a single scheme, effective for accounting periods beginning on or after April 1, 2024. This new scheme has a uniform R&D tax credit rate of 20%.
R&D Intensive SMEs: Loss-making SMEs that spend more than 30% of their total expenditure on R&D qualify for a higher tax credit rate of 27% under the new SME intensive scheme.
Rate Changes: The RDEC rate increased from 13% to 20% from April 2023, and the SME additional deduction rate decreased from 130% to 86% from April 2023.
Subcontracting and Overseas Costs: Overseas costs for externally provided workers, subcontractors, and contributions to independent R&D are no longer eligible, except where it is wholly unreasonable to replicate the conditions in the UK.
Digital Submission: All R&D claims must be submitted online, and additional information, such as a breakdown of R&D expenditure, must be provided to support claims.

Impact on Businesses

Simplified Claims Process: The merger of the schemes and the requirement for digital submission are designed to simplify the claims process and reduce errors.
Increased Scrutiny: There is a higher level of scrutiny on who submits the claims, with all claims needing to be supported by a named officer of the company to protect against unauthorised claims.
Financial Impact: The changes affect the amount of relief companies can claim, with R&D-intensive SMEs benefiting from higher rates, while other SMEs may see reduced benefits compared to previous rates.
Innovation Incentives: The reforms aim to encourage more investment in R&D by making the system more competitive internationally and reducing the cost of innovation for businesses.

How Can Businesses Apply for R&D Tax Credits?

To apply for R&D tax credits, businesses must identify and document qualifying research activities and submit the necessary forms with their tax returns. This process involves a thorough review of your financial records and business documents to ensure you meet the IRS's criteria.

Application Process

Identify Qualifying Activities: Determine which of your business activities meet the IRS's four-part test for qualifying research activities. This includes ensuring the activities are related to your trade or business, grounded in physical or biological sciences, engineering, or computer science, intended to develop a new or improved business component, and involve a process of experimentation to address technical uncertainty.
Calculate Qualified Research Expenses (QREs): Calculate the expenses associated with these qualifying activities, including domestic labor, supplies, contracted services, and cloud computing related to product, software, or process development.
Choose the Credit Method: Decide whether to use the Regular Research Credit (RRC) or the Alternative Simplified Credit (ASC) method for calculating the credit. The ASC is often simpler and more accessible for smaller businesses.
Fill Out Form 6765: Complete Form 6765, “Credit for Increasing Research Activities,” and submit it with your business’s federal income tax return. Indicate whether you are using the RRC or ASC method.

Required Documentation

Payroll Records: Keep detailed payroll records for employees directly involved in R&D activities, including wages for technical design, prototyping, testing, and supervision.
Expense Records: Maintain records of expenses, receipts, and accounts for supplies and equipment related to R&D. This includes unrecovered raw materials used in R&D.
Contracts and Invoices: Document contracts and invoices paid to any third-party partners involved in R&D, ensuring they involve economic risk and are related to development, engineering, and research.
Technical Documentation: Gather blueprints, patents, designs, drawings, and prototypes related to the research activities. Also, keep project and meeting notes that detail the research process.
Proof of Experimentation: Document the systematic process of experimentation, including any modeling, simulation, or trial and error methods used to develop or improve products or processes.

By meticulously documenting these aspects and following the application process, businesses can successfully claim the R&D tax credit and reduce their federal tax liability.

What Common Mistakes Should Be Avoided When Claiming?

When claiming taxes, it is crucial to avoid mistakes that can lead to penalties, delays, or even legal issues. Here are some key areas to focus on to ensure your claims are accurate and compliant.

Overclaiming

Overclaiming involves claiming expenses or deductions that you are not entitled to, which can result in significant penalties from HMRC. For instance, claiming personal expenses as business expenses or including expenses that are not "wholly and exclusively for trade" purposes can lead to issues.

To avoid overclaiming, familiarize yourself with the list of allowable expenses and keep clear records of all your business receipts. Ensure that you only claim expenses that are directly related to your business activities.

Underclaiming

Underclaiming occurs when you fail to claim all the expenses or deductions you are eligible for, leading to an unnecessarily high tax bill. This can happen due to a lack of knowledge about what expenses are allowable or simply overlooking certain costs.

To avoid underclaiming, make sure you are aware of all the expenses you can claim, such as office supplies, travel expenses, and equipment costs. Keep detailed records of all your business expenditures to ensure you claim everything you are entitled to.

Documentation Errors

Documentation errors can cause significant problems when claiming taxes. These errors include missing or incorrect information, such as your Unique Taxpayer Reference (UTR) or National Insurance (NI) number, and failing to provide supplementary pages required by HMRC.

Ensure that your UTR and NI number are correctly entered on your tax return. Also, check the full list of supplementary pages required for your specific situation, such as SA102 for employees and company directors or SA103S for self-employed individuals.

Additionally, keep accurate and complete records of all your business transactions and ensure that all necessary documentation, such as VAT invoices and proof of expenses, is in order to support your claims.

How Can Professional Advice Enhance R&D Tax Credits Claims?

Professional advice can significantly boost your R&D tax credits claims by ensuring you meet all the eligibility criteria and submit accurate, complete applications. Experts can help you identify and document all qualified research and development expenditures, maximizing your potential credit.

Role of Tax Credit Specialists

Tax credit specialists play a crucial role in the R&D tax credits process. Here are some key aspects of their role:

Identify Eligible Expenditures: Specialists help in identifying wages and other expenses that qualify for the R&D tax credit under IRC §41, ensuring that all eligible costs are included in the application.
Accurate Documentation: They assist in gathering and organizing the necessary documentation, such as records of qualified research and development activities, to support the credit claim.
Compliance with Regulations: Specialists ensure that the application complies with all state and federal regulations, including the submission of Form DP-165 and Federal Form 6765 by the deadline of June 30 following the tax year.
Optimize Credit Amount: They calculate the credit amount accurately, ensuring it is the lesser of 10% of the qualified R&D expenses over the base amount or $50,000, and handle any proportional reductions if the aggregate credits exceed the state cap.

Benefits of Expert Guidance

Expert guidance in R&D tax credits offers several benefits:

Maximized Credits: Experts help in identifying all possible qualified expenditures, thereby maximizing the amount of credit you can claim.
Reduced Errors: Professional advice minimizes the risk of errors in the application process, ensuring that your claim is not rejected due to incomplete or inaccurate information.
Time Efficiency: Specialists handle the complex and time-consuming process of preparing and submitting the application, allowing you to focus on your business operations.
Future Planning: They can provide insights into how to structure future R&D activities to optimize tax credits, helping you plan strategically for your business.

By leveraging the expertise of tax credit specialists, you can ensure that your R&D tax credits claims are handled efficiently and effectively, maximizing the benefits for your business.

In Conclusion

R&D tax credits in New Hampshire are a vital incentive for businesses to invest in innovation and economic growth. These credits, established by the New Hampshire Legislature in 2007, are designed to support qualified manufacturing research and development expenditures within the state.

The credits offer significant financial benefits, allowing businesses to reduce their tax liability and boost cash flow. For instance, the credit is calculated as 10% of the qualified R&D wage expenditures, with a maximum credit of $50,000 per fiscal year. This can be particularly beneficial for small and midsize firms, as it enables them to invest more in research and development activities, thereby enhancing their competitiveness and contributing to the state's economic development.

By claiming these credits, businesses in various sectors, including manufacturing, technology, and life sciences, can offset their tax liabilities and allocate more resources towards innovation. The credits are applied against the Business Profits Tax and any remaining amount can be applied against the Business Enterprise Tax, providing a direct financial advantage.

To ensure you maximize the benefits of these credits, it is crucial to seek professional advice. Experts at R&D Tax Credits UK can help you identify and document all qualified expenditures, ensure compliance with regulations, and optimize the credit amount. By leveraging their expertise, you can navigate the application process efficiently and make the most of the R&D tax credits available in New Hampshire.

If you are a business in New Hampshire engaged in research and development activities, do not miss out on the opportunity to claim these valuable credits. Contact R&D Tax Credits UK today to get expert guidance and maximize your R&D tax credits, helping your business thrive and innovate in a competitive global market.