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R&D Tax Credits — An Ultimate Guide

13 June 2023

A featured image for the blog post explaining R&D tax credits

Innovation is the lifeblood of business success, but it often comes with financial challenges. That’s where R&D tax credits come into play. Whether you’re a start-up aiming to disrupt industries or a seasoned company striving to stay ahead, understanding these credits can be a game-changer. In this guide, we’ll explore R&D tax credits, their eligibility criteria, qualifying costs, R&D schemes, and how they can supercharge your innovation efforts and bottom line. Let’s dive in and uncover the secrets to driving innovation while saving on taxes.

What are R&D tax credits?

The R&D tax credits serve as governmental incentives formulated to foster and facilitate R&D activities carried out by businesses operating within the UK. The initiative by the UK government was first introduced in 2000 to encourage small and medium-sized companies to invest more in R&D activities. A separate scheme known as the Research and Development Expenditure Credit (RDEC) was introduced in 2002 for large companies. This opens the window for businesses to stretch the scope of their R&D endeavours and enhance operations to fuel growth, all while alleviating concerns about R&D expenditures.

How do R&D tax credits work?

You can apply for R&D tax credits to claim cash refunds from HMRC or enjoy corporation tax reductions on qualifying R&D expenditures if your business is engaged in:

  • The development of new or improved products, processes, services or even the advancement of existing ones
  • Overcoming technical challenges or uncertainties to achieve scientific advancements
  • Systematic investigation or experimentation throughout the process

The dynamics of these activities may vary based on the industries considering the broad horizons of R&D.

What are the qualifying R&D expenditures?

Carrying out R&D activities is evidently associated with expenses also known as Qualified Research Expenses (QREs) that companies incur in order to achieve innovations. Most of these costs fall under the category of R&D expenditures, which include staff PAYE costs/pension contributions, subcontractors’ costs, consumables, software purchases, travel costs, and utility bills.

What costs don’t qualify for R&D tax relief?

R&D tax credits are specifically intended to assist companies engaged in trial and error for innovations and advancements. This implies that expenses related to the production, distribution, or creation of goods and services resulting from R&D work cannot be claimed. Additionally, expenses such as rent, land, and patent creation are also ineligible for claiming.

Who can claim R&D tax credits?

The legislation governing R&D tax credits has intentionally cast a wide net, encompassing diverse sectors such as Information Technology (IT), construction, manufacturing, renewable energy, engineering, and more. Its broad spectrum ensures that innovation across various industries can qualify for these credits. In order to be eligible for the R&D tax credits, you must:

  • Be any limited company, other than limited liability partnerships (LLPs) in the UK that is subject to Corporation Tax
  • Have carried out qualifying R&D activities
  • Have spent money on these projects in the UK

It’s important to note that even unfinished or abandoned projects that meet the criteria can still be eligible for claiming R&D tax credits.

Don’t let them go to waste — they could still be the source of your financial stability and future prospects of growth.

Who qualifies for R&D tax credits?

R&D is fuelling innovation and growth in almost all industries: Information Technology (IT) drives advancements in emerging technologies, manufacturing focuses on cost-effective operations, construction adopts advanced safety measures, renewable energy seeks sustainability, engineering delivers reengineered solutions and so on, making it applicable to these sectors plus many more.

What counts as R&D?

The qualifying activities for R&D vary across industries, considering the broad scope of possibilities in their respective field. In order to ascertain eligibility for R&D tax credits, companies need to follow a four-criteria model, commonly referred to as the four-part test. This model offers a more precise perspective and helps determine whether a company qualifies for tax credits.

The four criteria for R&D tax credits

The four criteria also known as the four-part test evaluate activities related to the company’s business operations in terms of R&D. To qualify for R&D tax relief, the activities must be conducted in accordance with the following criteria:

  1. Permitted Purpose delineates the R&D activities conducted with the aim of enhancing the performance, reliability, quality and functionality of a product or software.
  2. Technological Uncertainty refers to the unpredictable results that may arise during the development of a product or software, including the associated processes.
  3. The process of Experimentation indicates the need for a trial-and-error phase with the intention of overcoming technological uncertainties.
  4. Technological in Nature means that the R&D activities must fall within the domains of engineering, physical sciences, biological sciences, or computer science.

Simply put, if your business is involved in developing new or improved products, processes, services, or advancements, overcoming technical challenges, and conducting systematic investigation or experimentation within technological fields, you may be eligible to apply for R&D tax credits.

Which R&D tax credit scheme is right for me?

The initiative covers two R&D schemes for claiming R&D tax credits: the SME Scheme and the RDEC Scheme. The SME Scheme is designed for companies with less than 500 staff, a turnover under €100m, and a balance sheet under €86m. Eligible SMEs can deduct an additional 86% of their qualifying R&D expenditure from their taxable profit or claim up to 10% of the surrenderable loss as a cash injection for loss-making businesses.

On the other hand, the RDEC Scheme is used by larger companies or SMEs that have received grants or subcontracted R&D from a non-SME. Companies qualifying for the RDEC Scheme can expect to claim up to 15% of their eligible expenditure provided they have a staff headcount over 500, a turnover of €100m or more, and at least €86m or more in gross assets. These schemes offer different opportunities for businesses to benefit from R&D tax credits based on their size and specific circumstances.

Contact our R&D tax credit specialists to find out the suitable scheme for you or hop into our Knowledge Library to learn more about the schemes.

What are the rates of R&D tax credit schemes?

The rates of R&D tax credits heavily depend on the specific R&D scheme and the context of your company. Here are the rates according to the scheme:

SME Scheme:

  • Profitable SMEs can benefit from an enhanced deduction of 86% on qualifying R&D expenditure, in addition to the standard 100% deduction. This means a total deduction of 186%.
  • Loss-making SMEs can claim a tax credit worth up to 10% of the surrenderable loss, which can be used to offset against other taxes or received as a cash payment.

RDEC Scheme:

Eligible companies can receive a tax credit of 20% on their qualifying R&D expenditure under the RDEC scheme.

Note: These rates are subject to change based on the ever-evolving legislation by the Government, so it’s advisable to consult with R&D tax credit specialists for the most up-to-date information on R&D tax credit rates.

How to calculate R&D tax credits?

There are R&D tax credit calculators available online specifically designed to simplify the complex process of determining your eligible tax credits.

With just a few inputs, these calculators swiftly and accurately evaluate your R&D expenditures and applicable tax incentives. They eliminate the guesswork of how to calculate R&D tax credits by providing precise estimates, helping you apply for R&D claims with confidence and maximising your tax benefits.

How far back can you claim R&D tax credits?

You can reclaim your research tax credits for a period of up to two years after the end of your accounting period. It is highly recommended that you include all eligible qualified research expenses (QREs) that were incurred within the period you are claiming prior to the conclusion of the two-year window.

What are the benefits of R&D tax relief?

R&D tax credits in the UK offer significant financial benefits to businesses. The initiative provides a valuable source of funding to support the R&D initiatives for small and medium-sized enterprises (SMEs). SMEs can potentially claim a higher tax relief rate than larger companies. Essentially, R&D tax credits fuel companies’ financial resources, encouraging increased R&D activities across industries and ultimately contributing to the growth of the UK economy.

How can we help maximise your R&D claim?

Our team of experienced R&D tax credit specialists is well-versed in the ever-evolving governmental regulations, grants, tax incentives, and funding opportunities available to companies across various industries within the UK. And to ensure you’re always informed and well compensated for your claims, Alexander Clifford is here to provide the support and guidance you need to stay ahead and succeed. We are well-versed in the R&D claim process, boasting a 100% success rate with HMRC. With our best-in-class expertise, we can help you accurately and precisely claim R&D tax credits based on the latest guidelines.

Having second thoughts? Check out our 5-star reviews and personal recommendations, book a free consultation for tailored advice or start your R&D claim process with confidence to maximise your potential benefit.

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