Frequently Asked Questions
about R and D Tax Credits
What are R&D Tax Credits?
The UK government offers R&D Tax Credits as an incentive for companies to innovate, allowing them to reclaim up to a third of their expenses in areas like staffing, hardware and software, and prototype development.
This scheme is available to any UK company regardless of profitability or previous corporation tax payments, and the definition of qualifying innovation is broad, encompassing a wide range of industries and ideas.
Transcript of Video
R&D Tax Credits are a scheme where the UK government pays companies to be innovative. They'll pay YOU back up to 1/3 of whatever you've spent doing so. This includes: staff, contractors, cloud computing, software licenses, data licenses and anything you've used up for testing or prototypes.
Now, you have to be a UK company, but you don't have to be profitable and you don't have to ever paid corporations tax. In fact, over half of the companies who claim haven't done either. And, what they do is they get a cheque back from the government.
“Sounds great”, I hear you say. “But what's innovation? What qualifies as Research and Development?”
Well, the definition is very broad. It can be any industry, any idea and you certainly don't need scientists in white lab coats in order for it to be R&D.
Now, there's a lot more that I can say, but let me turn this back to YOU. What are YOUR questions? Have a look through the below FAQs and, if I've answered your question, you'll get some concise text and another video. But, if the answer isn't there, just email me on: questions@nhal.uk or go to our TikTok channel: @AIaccountant
What qualifies as R&D?
R&D Tax Credits allow businesses to reclaim up to 1/3 of their qualifying Research and Development (R&D) expenses.
Key elements of qualifying R&D include undertaking a distinct project aimed at achieving a permanent and appreciable improvement in the company's core business or a new venture.
The project must involve uncertainty and trial and error, not due to a lack of expertise or knowledge of existing methods.
Additionally, the project should result in learning something new, enhancing the company's capabilities. Cosmetic improvements, packaging, market research, and financial/legal/marketing analyses are excluded.
If a project meets these criteria, it likely qualifies for R&D and is eligible for Tax Credits.
Transcript of Video
R&D Tax Credits let YOU claim back up to 1/3 of your qualifying Research and Development expenditure. But what qualifies? Well, there are 5 elements.
Before I start, let me just say that this question … What qualifies for R&D? … cuts to the heart of why many small businesses don't claim the money that they're legitimately owed, and why an entire industry of professional R&D tax credit consultants has popped up. This occurs because HMRC has 43 different requirements, but many of these cover exceptions and edge cases that we don't really need to worry about. So, at its core, Research and Development involves 5 elements.
First, because it's not "business as usual", Research and Development is usually a distinct project. It has a specific goal, and it's usually a bit complicated. (As a side, running it as a separate project also helps you then identify the expenses associated with that project.)
Second, this goal should be for a permanent, appreciable improvement in your core business or business you're thinking of entering. Typically, you would be improving the thing that you're selling.
You could be making a direct improvement to your product or service, or, perhaps, you're improving the device, the materials, or the process, or the tools used for your product or service. Usually, your goal will be something tangible – like: a better product, more features, less costly, less waste.
But, your goal could also be something intangible – like: a better understanding about some aspect of your product or the process or the devices, which could lead to some sort of tangible improvement in future.
As you can see, the definition is pretty broad. So, you need to think in terms of your company's capabilities – making improvements to your capabilities. So, things like cosmetic improvements and packaging, doesn't count. Market research doesn't count. Analysing the financial, legal, or marketing impacts of various changes, don't count.
Third, this project needs to be a bit complicated. There needs to be some uncertainty. So, you may not really know whether the project's going to succeed when you start. Maybe you don't even know where to start. Or, perhaps you have a good idea (of where to start), but there's some questions that are going to have to get figured out along the way. Basically, there's gonna have to be some trial and error. And, this is an important point, the project CAN fail. The fact that it fails would prove that there was uncertainty.
Fourth, this uncertainty is not because you haven't hired the right people or you haven't read up on what everybody else is doing. Kind of ask yourself this question: Is there someone who I could have hired … (you know, a regular person, not a Nobel Laureate or somebody with trade secrets from your competitors) … Is there somebody you could have hired for whom this would have been straightforward? If there was, then there was no uncertainty and this probably wasn't Research and Development.
And finally, fifth, (and this is something that often catches out software companies) you need to have learned something from this project. Think of it this way, if everything was burned down or got lost, and you had to do it all over again, would you be faster doing it again because you've learned something? And, what did you learn? Now, you don't have to be specific about what you learned, but it's that idea – that you were advancing, you're making an advance – that makes it Research and Development.
So, in summary, generally it's a distinct project. It has the goal of permanently and appreciably improving the capabilities of your company. There was some uncertainty in this project. You weren't sure how you were going to do it, or that it was going to succeed. And, this uncertainty is not because you didn't have the right people, or you hadn't read the right materials. And, finally, it did … you did learn something from it. The next time you do it, it will be easier.
If this sounds like something you were doing, then it's very likely, you were doing Research and Development and it's very likely you can reclaim qualifying expenses.
How does the R&D Tax Credit process work?
The R&D Tax Credit claim process involves five key steps:
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deciding the financial year for the claim,
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potentially notifying HMRC if it's a first or a lapsed claim,
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filling out an online Additional Information form,
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completing a CT600L form with relevant R&D claim details, and
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submitting these with the corporation's tax filing.
While these steps seem straightforward, special attention must be paid to the Additional Information form, which requires a thorough understanding of HMRC's perspective. This form, essential for justifying the R&D activities, is critical and can be effectively managed with tools like an AI accountant robot to:
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organize your thoughts,
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gather information, and
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present it understandably to HMRC.
Transcript of Video
There are 5 steps to making an R&D Tax Credit claim.
First, figure out what financial year you're talking about, and begin to get your thoughts in order.
Second, you may need to notify HMRC that you're going to make an R&D Tax Claim IF … you haven't made a claim before or within the past three years. Now, this rule doesn't actually come into effect unless you're claiming for a financial year that started after April 1st, 2023. And, you don't have to notify them until 6 months after the end of that financial year. So, most likely, this won't even become an issue for anyone until September 2024.
Third, you need to fill in an online Additional Information form. It has over 50 questions, and this covers (kind of) all the key topics of your claim. Basically, this is how you justify that you actually are doing Research and Development. Now, you have to complete this form before you file your corporation's taxes, but you can complete it the day before.
Fourth, then when you file your corporate taxes, you file an additional form, a CT600L, which has all of the numbers relating to your R&D Tax Claim and it gives you the numbers that you then put into your corporate tax forms.
Fifth, if your corporation then owes HMRC money, you simply don't pay them the money that you're claiming for. If HMRC has any questions, they'll ask you. Now, if you don't pay corporations tax, HMRC will then aims to send you a cheque within 6 weeks of you filing.
That's it. So, in summary,
(1) you have to decide which financial year you're gonna be claiming for;
(2) you may need to notify HMRC that you're going to be filing a claim;
(3) you need to fill out the Additional Information form, which is online;
(4) you need to complete a CT600L form; and
(5) you submit that with your corporation's tax filing.
Now, when I say that there's just 5 steps, I don't want to downplay the Additional Information online form. It asks some pretty sweeping questions, and you really need to get your head around the way that HMRC thinks. But, that's exactly what the AI accountant robot is for. It's for:
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getting your thoughts in order,
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collecting all the information together, and then
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recasting it in a way that HMRC can understand.
How does the AI Accountant process work?
The AI Accountant process consists of three main steps.
First, you engage in a detailed conversation with an AI robot about your Research and Development (R&D) project to ensure it meets all requirements for R&D Tax Credits. During this phase, the AI helps you focus on crucial project aspects, often overlooked initially.
Second, if the project qualifies, the AI drafts responses to HMRC's five key questions, forming the bulk of your tax credit claim. You review and refine these answers, and the AI assists you in identifying qualifying expenses across eight potential categories.
The final step involves the AI generating two essential documents: a list of questions and answers for the HMRC's Additional Information form and a completed CT600L form for your corporate tax return.
Transcript of Video
There are 3 steps to our process, and it starts with the conversation with our patient, insightful AI robot.
Now, before I go further, I want to emphasize a key distinction. YOU, as a business owner, think about your business objectives and then, you set goals and then, as you're trying to achieve those goals, you hit challenges and then, you overcome those challenges and then, you have a solution to the problem.
Now, HMRC (kind of) approaches this entirely in reverse. They start with the solution to the problem, (which they call an Advance in Science or Technology) and then, they step back from there to: the uncertainties that you had in finding that solution and then, they step back from there to: what were the business justifications for having this project and running into those uncertainties. And, this is why it can be difficult getting your head around these R&D Tax Relief claims.
And this is why an entire industry of R&D Tax Credit consultants has popped up. It's to help people get their head around the way you have to explain your projects HMRC. But this then leads back to our 3 step process.
So, first, you enter into a conversation with our patient, insightful AI robot. It asks you questions about your Research and Development project or projects, and it makes sure that they meet all of the requirements. Now, it's not uncommon for (initially) your projects to not meet the requirements, because you're emphasizing the wrong aspect … you're glossing over details that you think are unimportant. But, that's why it's useful to have this conversation … this back and forth … where you're asking questions, and it's asking questions so that you can really focus in on the core issues to see … to assess whether the project qualifies.
This conversation is in 7 phases. And, as you progress, if you find that you've talked yourself into a corner, you can step back a step or two and (kind of) change the emphasis until you really get your head around how to describe this project to meet the requirements. Your conversation is entirely confidential. During the conversation, you're never ask to name your business, to name yourself, or anything like that. We need your email address for login and security purposes.
Second, after you finish the conversation, assuming you've convinced the AI that your project qualifies for R&D Tax Credits, the AI then writes a first draft of answers to the 5 meaty questions on HMRC's Additional Information form. What you'll find is that these 5 answers constitute the bulk of your R&D Tax Credit claim. And so, the second step is for you to review those answers, and to tweak them as necessary to increase the importance of certain items, add in details, and make other minor adjustments.
Now, with the clear understanding of your R&D projects and the uncertainties that you resolved, (also as part of Step 2) we then go through the 8 potential categories of claims: so that's:
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(i) staff,
(ii) subcontractors,
(iii) externally supplied workers (sometimes known as agency staff),
(iv) clinical trial volunteers,
(v) cloud hardware,
(vi) software purchases and licenses,
(vii) data licenses, and
(viii) any materials or things consumed as part of your testing or prototyping.
So, we then … the AI walks you through those categories. You can begin to decide: Do you have qualifying expenses? This is the first time then that we start asking specific details about your company because we want to collect all of the information necessary in one place to make it easier to fill in the online forms.
The final step then is that the AI robot produces 2 documents. The first is: A list of all of the questions and your answers for the online Additional Information form to make that straightforward to fill in. And the second is: A completed CT600L form, which has the final numbers that you can put onto your corporate tax return.
In summary, the 3 steps are:
First, you have a conversation with our AI robot so that it and you fully understand what the R&D project is (projects) that you're talking about and that they qualify.
Then, the second step is: You review those 5 answers and tweak them as necessary to make sure that there as clear as possible. And then, using that understanding, you think about and walk through … the 8 categories of expenses identify the qualifying expenses related to your R&D project. At the same time, we ask some questions about your company.
And then the third step: the AI robot produces two documents: (1) the 50 questions and answers for the online Additional Information form to make filling in that form … completing that form … a breeze. and (2) a completed CT600L form, which you then file with your corporate taxes.
How long does the R&D Credit process take?
Completing the R&D Tax Credit process typically takes less than a day for well-prepared applicants.
The process's duration largely depends on:
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the applicant's familiarity with their R&D projects,
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their understanding of HMRC's perspective on Research and Development, and
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the ease of extracting necessary information from accounting systems.
The process involves discussing R&D projects with an AI tool, gathering various reference numbers, completing the online Additional Information form, and confirming the details in the CT600L form. The effort required is concentrated, and the time taken can vary depending on the number of people involved in the process.
Transcript of Video
How long does it take to complete the R&D Tax Credit process? For most people, you can complete your application in less than a day as long as your records are organized and you have your thoughts in order.
The first thing this depends upon is:
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How well you understand the details of your R&D project, and
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How quickly you can get your head around the way HMRC thinks about Research and Development.
So, a typical conversation with our patient, insightful AI robot … within perhaps 30 minutes of concentrated effort … you can get through that phase. For reasons that I won't go into now, it's advantageous to describe 3 different R&D projects. So, assuming it becomes easier as you go along, typically you might spend an hour speaking to our AI to fully explain 3 R&D projects.
The second thing it depends upon is:
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How difficult it is to get information out of your accounting system, and, in particular, the right information … the information you're looking for and,
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How difficult it is to collect together various reference numbers you need for the filings.
There's not too much more variability from this point. Once all the information is put together, you need to complete the online Additional Information form. You'll have all the questions and answers. You could probably go through this in 15 minutes … let's say half an hour.
Then also there is the CT600L form. It's been completed. Obviously you need to make sure it's accurate. There's not a lot of numbers there. Perhaps 5 minutes to make it accurate. Perhaps another 5 minutes to work those numbers into your corporate tax form and make suitable adjustments.
So, as I said at the top, you could probably get your R&D Tax Credit claim done in less than a day. But, it's gonna be a bit of concentrated effort. You're going to have to have your head around the project. You're going to have to get your head around the way HMRC thinks. You're going to have to pull some information out of your accounting systems. You may need to collect together various corporate information. You'll need to go online to fill in the 50+ questions on the Additional Information form. And you'll have to glance through the CT600L form.
So, if it's one person, you can do it all fairly quickly. If you've got multiple people in the loop, it may take a little bit longer.
What Information's Required for a Claim?
To initiate an R&D Tax Credit claim, it is essential to have a comprehensive understanding of your Research and Development projects, including their goals, faced uncertainties, and the scientific or technological advances they led to.
You must also review and determine the percentage of your qualifying expenditures linked to these projects. Additionally, basic company information such as:
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the company name,
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numbers (company, UTR tax, VAT, PAYE reference), and
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shareholder details are required.
It's important to identify any connected or partner companies and provide information on EU grants, subsidies, subcontracting, or other unique corporate tax elements related to the R&D work.
Lastly, completed corporation tax forms are necessary for integrating the findings from your CT600L form into your corporate tax filing, which may reduce your tax bill or result in a refund.
Transcript of Video
The key information you need to have is: a good understanding of your Research and Development projects. What were their goals? What uncertainties did these projects face? How did you overcome those uncertainties? And ultimately … How can you describe those solutions in terms of an Advance in Science and Technology.
Second, with a clear understanding of these projects in mind, you then need to go through your potentially qualifying expenditure and decide what percentage of that cost relates to the various projects.
Beyond that … You need some company information:
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company name,
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company number,
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your UTR tax number,
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your VAT number,
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your PAYE reference number,
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some details about your shareholders.
See, connected companies are treated slightly differently with R&D Tax Credit claims. So, you'll need to be able to identify: if there are any connected or partner companies to your company.
And finally … to ensure that your Research and Development is not double counted HMRC wants some information on: Did you have any EU grants? Did you get any subsidies (for the R&D work)? Where you a subcontractor (for the R&D work)? Did you have other unusual corporate tax elements?
For most corporations, especially small ones, the answers to all these will be: No. But, you just need to go through and check them.
And obviously the final thing you will need are completed corporation tax forms so that the numbers that emerge from your CT600L form can be inserted into your corporate tax filing so that you reduce your tax bill or get money back.
What options are there for help on a claim?
There are three main ways to complete an R&D Tax Credit claim:
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doing it yourself,
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using traditional R&D Tax Claim consultants, or
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utilizing Artificial Intelligence services like AI Accountant.
The DIY approach requires understanding HMRC's unique perspective on R&D, which differs from an entrepreneur's view.
Traditional consultants offer comprehensive assistance but may only engage with larger claims due to their fee structure.
The third option, a recent innovation, involves AI tools like AI Accountant, which combine the experience of seasoned professionals with AI's efficiency, offering a cost-effective and less stressful solution for processing R&D Tax Credit claims.
Transcript of Video
Broadly speaking … There are 3 ways that you could complete an R&D Tax Credit claim.
First, you could do it yourself. All of HMRC's requirements are online. All of the questions on the Additional Information form are explained in detail online. So, you could do this yourself.
The problem with this approach is that HMRC looks at Research and Development in an entirely different way than entrepreneurs do. As an entrepreneur, you spot a business opportunity. You think about how you can meet it. In trying to meet it, you run into certain challenges. And, overcoming those challenges requires certain solutions.
In contrast … HMRC almost looks at it in reverse. They start with your solutions, and their first question is: What Area of Science or Technology are you working in? And then, your solution: What Advance did it make in that Area of Science and Technology? Then, stepping back from there: What uncertainties did your project face, which then led to this Advance in Science and Technology. Et cetera.
So, it's the same project, but they're looking at it from a completely different direction. If you can get your head around these alternative perspectives, then it's fairly straightforward for you to file your own claim.
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So, your second option is to use R&D Tax Claim consultants. They'll help you from beginning to end, and they usually charge a percentage of the amount of money you've claimed. The percentage varies from about 10% to 20%. But, therein lies the problem. Because they have highly skilled staff, who need to come up to speed on your business, and on your Research and Development projects, and all of the steps involved, they generally wouldn't take on a client where they can't earn at least £10,000 in fees. Which means that, your claim needs to be worth about £50k - £100k, which means that you need to have about £150k - £300k of qualifying expenditure for them to be interested.
If your claim isn't on that scale, you might find it very difficult getting R&D Tax consultants interested in working with you.
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A third option has only recently become available, taking advantage of the great strides being made in Artificial Intelligence and using Artificial Intelligence instead of highly skilled human consultants to do this kind of translation work.
One such company is my company, AI Accountant. I've been filing R&D Tax Credit claims for over 20 years. I've claimed back over £1 million from HMRC. And, I trained our AI robot to understand it both ways: (1) How entrepreneurs understand their own Research and Development, but also (2) How HMRC wants those same projects described to them. For a modest fixed fee, you could take advantage of all of that knowledge and experience we programmed into our AI robot to supercharge your R&D Tax Relief claim process, to reduce stress levels, reduce time, and reduce mistakes.
How is AI Accountant Unique?
Our R&D Tax Claim consultancy service stands out because we offer AI assistance, providing a cost-effective and confidential alternative to traditional professional consultancy.
While professional consultants typically charge a high commission and often overlook smaller businesses with less than £150,000 in qualifying R&D expenses, our AI Accountant charges a modest fixed fee of £250 only if a claim is made.
This AI assistance guides you through the entire claiming process, from understanding HMRC requirements to completing necessary forms, ensuring compliance and mitigating the risk of rejection faced by smaller claims.
This approach is particularly beneficial for small businesses that might otherwise choose to handle claims independently, use less reliable AI tools, or not file at all.
Transcript of Video
Professional consultants work on a commission basis. They can charge up to 20%, but perhaps more typically 10%. Now, because they need to get a highly skilled individual fully up to speed on your business and fully up to speed on your R&D projects so that they can explain them to HMRC, most consultancies aren't interested in working with clients where their fees aren't going to be at least £10,000.
So, you can do the math. Assuming a 20% commission knowing that you're gonna get back about 1/3 of your expenditure, most consultancies are not interested in working with companies who have less than £150,000 of qualifying R&D expense.
If you have that much R&D expense, then there are many advantages to using professional consultants. But, if you don't, your only options really are:
(1) do it yourself,
(2) use an AI robot, or
(3) don't file at all.
The problem with doing it yourself is that HMRC has calculated that 78% of claims worth less than £10,000 are non-compliant either through fraud or error. As a result of these perceptions, HMRC tends to take a good hard look at smaller claims and then to summarily reject these claims, if even the smallest of mistakes is found because they know that often it's uneconomic for small companies to challenge such rejections.
Using AI assistance often gives you the best of both worlds.
First, you have access to a trained professional (in this case, an AI robot) who can help you understand what HMRC is looking for and help you assess whether you even have a claim.
AI assistance is also very affordable. For example, my company, AI Accountant … we charge only a fixed fee of £250 if you make a claim and if, after the conversation with the AI, you decide that perhaps you don't have a claim or you don't want to file one, then that fixed fee is waived and you only pay £10 for the running cost of that AI itself.
Third, AI assistance helps you every step of the way. It starts with the conversation with our patient, insightful AI to help you understand what HMRC is looking for and to help you assess whether you have a claim at all. It then walks you through the middle bit of collecting the various information, of assessing what expenses qualify, and then it helps you at the end: giving you a cheat sheet of questions and answers for the online Additional Information form. And it completes the CT600L form.
And fourth, AI assistance is entirely confidential. We ask NO personally identifiable questions, either about you or your company during the conversation. So, up until the point where you assess that you have a claim, there are no details – other than your email used for login. All of the data you provide is password protected and encrypted. and, when your application is completed, all of the information is archived offline and then deleted, when it's out of date.
These are the advantages of using AI Accountant for your R&D Tax Credit claim especially if you're a small business.