R&D tax credits explained
Rewarding innovation and fuelling growth, R&D tax credits have the power to transform your business.
What are R&D tax credits?
Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and ultimately growing.
How do R&D tax credits work?
Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
Is my business eligible for R&D tax credits?
To benefit from R&D tax incentives, you must:
- Be a limited company in the UK that is subject to Corporation Tax.
- Have carried out qualifying research and development activities.
- Have spent money on these projects.
Who qualifies for R&D tax credits?
R&D can take place in any sector. It occurs in everything from cheese-making to chemical engineering, and construction to digital development.
What counts as R&D?
The HMRC R&D criteria are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:
Creating new products, processes or services.
Changing or modifying an existing product, process or service.
If you’re not sure if your project is possible, or you don’t know how to achieve it in practice, you could be resolving technological uncertainties and be carrying out qualifying R&D.
Within the government’s accepted research and development definition, R&D doesn’t have to have been successful to qualify. You can also include work undertaken for a client, as well as your own projects.
What costs qualify for R&D tax credits?
When putting together an R&D tax credit claim, we look for the following types of R&D qualifying expenditure:
- Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
- Subcontractors and freelancers.
- Materials and consumables including heat, light and power that are used up or transformed by the R&D process.
- Some types of software.
- Payments to the subjects of clinical trials.
What R&D tax credit scheme is right for my business?
What scheme you use to make an R&D tax credit claim will largely depend on whether you are an SME or a large company.
Fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.
500 staff or more and either more than €100 million turnover or €86 million gross assets.
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax credit scheme. And if you are a large company, via the Research and Development Expenditure Credit (RDEC).
However, there are a few factors like grants and subcontracting that can restrict an SME from accessing the SME scheme. This means you may need to make a claim via RDEC – or via both schemes.
We help SMEs across all sectors receive millions of pounds every month to re-invest back into their businesses. It is possible to make use of R&D tax credits and grant funding together by using both schemes to ensure maximum value.
How much is an R&D tax credit claim worth?
R&D tax credits are calculated based on your R&D spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate (see below). This produces your ‘enhanced expenditure’.
When you deduct your enhanced expenditure from your taxable profits, or add it to your loss, it will result in:
- a Corporation Tax reduction if you are profit-making
- a cash credit if you are loss-making
- or a combination of the two
R&D tax credit rates
SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. The average claim made by SMEs in the UK is £53,714 (2017-18).
Large companies are able to claim up to 11p for every £1 spent on qualifying R&D activities. The average large company (RDEC) claim in the UK is £600,977 (2017-18).
The R&D tax credit rates 2018 are shown in the table opposite.
The benefits of R&D tax credits
As a form of innovation funding, R&D tax credits can transform your business. At ForrestBrown, we are passionate about helping innovative companies realise the full potential of R&D tax incentives so that they can grow. This is because the benefits are wide-reaching.
The government benefits from increased productivity which is good news for UK businesses, and good news for the economy. It can also lead to innovation that can affect positive change on a global scale.
How do I know if I’m carrying out R&D?
If you are creating a new or improved product, process or service, your business might be carrying out research and development (R&D). You will probably be attempting to solve a problem where no solution is evident. This can take many forms. And R&D projects can include work undertaken for a client as well as your own business.
The government’s definition of R&D is purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:
- Creating new products, processes or services.
- Changing or modifying an existing product, process or service to make it better.
This means that if you’re not sure your project is scientifically or technologically possible, or you don’t know how to achieve it in practice, you could be resolving uncertainties and therefore qualify for R&D tax relief.
Where does R&D start and finish?
R&D work begins when a project seeks an advance in science or technology, and ends when the project’s uncertain elements have been overcome. Any user-testing or commercial marketing work beyond overcoming the project’s uncertainties will not be R&D.
How do I know if my projects qualify?
For a project to qualify as R&D, you should have set out to achieve an advance. That advance must be in the field of science or technology, not just in your company’s own knowledge. Your project can still be R&D if the advance has already been achieved but the details are not readily available because, for example, they’re a trade secret.
It’s important to remember that R&D is inevitably not always successful. If your project is ultimately unsuccessful but sought a solution which was not evident at the outset, it could still be R&D.
What kind of projects do not qualify for R&D tax credits?
Generally, routine copying of existing products, processes, materials, devices or services, will not usually qualify as R&D. Work to improve the cosmetic or aesthetic qualities of a process, material, device, product or service will not itself be R&D. However, work to create certain cosmetic or aesthetic effects through the application of technology can still qualify.
At ForrestBrown, our team includes not just qualified chartered tax advisers, but also sector specialists, lawyers, former HMRC inspectors, and even a rocket scientist!
We use a continually-evolving process to prepare R&D tax credit claims that meet HMRC’s high standards – and deliver maximum value to your business.
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