Top 6 Reasons to Claim R&D Tax Credits
Learn about how the R&D Tax Credits incentive can benefit your business
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There are a multitude of reasons to take full advantage of the R&D tax relief incentives available, especially given the government’s plans to prioritise support for innovation in the coming years. Only a small percentage of UK companies engaging in R&D make a claim, so we’re going to talk about six of the most predominant and valuable reasons to consider it, and why now is a particularly crucial and potentially advantageous time to.
Reason 1- Reducing Risk
It is commonly known that engaging in any kind of research and development can be time-consuming and costly. Braving the risk for little to no guaranteed success can be financially taxing on a business, especially when many R&D projects can take years to complete. Some of the most common risks associated with R&D projects are:
Strategic and Operational
Sustaining budget control, coherent operations and a vibrant working culture throughout the operation is vital but this could be compromised by bottlenecks in any part of the development process. The new/modified product can take longer to produce than initially anticipated, or can even be rendered unworkable by the end of the process.
A considerable amount of time and money can be invested into creating a new product or service, but the regulatory framework of the country you are operating in could delay or limit the distribution of it. This is particularly relevant in the pharmaceutical industry.
Another post-development related risk is the volatility of the market your product or service falls under. Consumer activity is unpredictable and can ultimately determine the success of your R&D project. Here you can find additional information relating to your specific sector:
The fundamentals of R&D is associated with creating something new and original and this inevitably poses risks associated with ownership or ideas, notably more so in markets where there is high competition in producing products/services of the like. It can be costly to approach trademarking and copyright.
The generous R&D Tax Relief incentives available can ultimately help mitigate some of these risks. You can claim up to 33p for every £1 you spend on R&D, and the projects level of success would not affect your claim.
Reason 2- R&D Tax Credits can be claimed for alongside grants
In mitigating these kinds of risks that can occur anywhere in the R&D process, you should ensure you accumulate a maximum body of funding. A common misconception is that R&D Tax Credits and grants cannot be used in conjunction with one another. This isn’t the case. They can both be utilised to create a comprehensive and continuous funding stream.
The only restriction involved is determining the extent of what you can claim through the R&D tax incentives in relation to the type of grant you have received. If your grant is considered notified state aid, then this is the only type of state aid you can receive for the project. However, unlike the SME (small to medium enterprise) tax relief scheme, the RDEC scheme for large companies is not considered state aid, therefore you can claim up to 10% of the expenditure through this scheme. If you are an SME, you can also claim any additional expenditure at the usual value of up to 33%.
Grants are great for an initial cash boost, but R&D tax relief should always be considered, as its retrospective nature is tailored towards cancelling out the often unpredictable financial obstacles you may encounter throughout your R&D project.
Reason 3- Qualifying Costs
There is an understanding that contributions towards the success of an R&D project come in various forms, and every contribution must work fluidly and effectively to maximise the projects potential. The R&D Tax incentives cover lots of ground, with several costs being eligible for relief. The qualifying costs include:
A comprehensive and experienced team dedicated to the project is vital, therefore salaries, NI and pension contributions, and certain reimbursements such as travel are all qualifying expenditures. The hours attributed to this particular project can be difficult to apportion, as it can often be a subjective matter. In applying for R&D tax relief, the success of the application is often determined by the inclusion of staff time attributed specifically to the research and development of the product/service, rather than its commercial success. This is something Counting King can assist with in compiling your claim.
SME’s can claim up to 65% of subcontractor costs.
Consumables and materials
Any materials that have been consumed or transformed during the R&D process are considered eligible. Such materials are commonly used during processes such as creating prototypes. It is important to distinguish that only materials used during and up until the end of the R&D process qualify.
Software costs attributed to R&D qualify as expenditure and this cost is particularly relevant as the Chancellor announced in the Spring Budget 2022 that all Cloud costs are now considered eligible for relief including the cost of any relevant storage. Cloud is becoming an instrumental component of many R&D projects. You can read more about this addition to the eligibility criteria here.
Clinical trials volunteers
This is normally only relevant in the pharmaceutical industry whereby costs are incurred in the acquiring of volunteers for clinical trials.
Reason 4- No Minimum Claim
Prior to April 2012 there was a £10 000 minimum expenditure for all R&D Tax Relief claims. That cap has since been removed, so any amount of expenditure attributed to R&D is now eligible for relief.
Reason 5- Largest Increase in Budget for R&D Tax Relief Claimants
A priority for the government post-pandemic is for R&D to comprise 2.4% of GDP by 2027, and on 14th March the largest ever budget increase was announced by the BEIS, allocating £39.8 billion over a three-year period. The government’s support for innovation is growing exponentially, which is why this reason is perhaps the most pertinent. Their intention to remain internationally competitive for innovation is now more charged than ever and the ever-increasing funding allocation for it is testament to this aim. Applying for R&D tax relief couldn’t be more timely. You can read more on this budget announcement in our blog here.
Reason 6- Striving for Growth in Every Sector
The incentives emphasis upon advancement in science and technology has perhaps fostered the myth that all R&D is exclusive to these industries without consideration of sub sectors or different sectors entirely. Businesses from any sector can apply for R&D Tax Relief providing they are seeking advancement in science or technology in some form.
The Fintech industry has undergone significant growth in recent years, with funding for the sector rising from ‘£685.3 million in 2014 to almost £2.4 billion in 2018’. Fintech Futures cite how R&D Tax Relief has been significant in promoting its growth. Various R&D activity has been recognised in the industry as qualifying for tax relief, including:
- Improving the ways in which we process payments and transactions, mobile banking, peer-to-peer lending and crowdfunding, and retail banking*
- Text analytics and language processing, aimed at finding better means of using technology to read documents*
- Projects to enhance areas like security, integration of systems and development of support software*
Fintech futures have ascertained that companies undergoing projects such as these are deemed to qualify for the R&D Tax incentives, affirming that ‘making a claim for those areas of fintech innovation can deliver significant financial rewards, which can be especially critical for businesses in their early development stages.’ Learn more here.
Contrasting this, however, is the success of the creative industries in securing R&D Tax Relief. The average Arts, Entertainment and Recreation claim has risen from £43,210 to £77,720 in recent years, busting the myth that R&D Tax relief is limited to companies falling under the science and technology sectors. The creative industries aren’t immediately considered as innovators in science and technology but have proven to be instrumental in achieving precisely this. In the year ending March 2021, £1.31 billion was paid out to the creative industries in R&D Tax Relief. R&D projects such as designing new lighting control systems, audio-visual infrastructures, and new software systems for music distribution are all activities that have qualified for R&D Tax Relief in the past and consolidate the Creative Industries’ role in innovating the UK.