What are R&D TAX CREDITS?

Research and Development (R&D) tax credits are a type of tax incentive provided by governments to encourage companies to invest in research and development activities. These tax credits are designed to reward companies that engage in innovative activities by reducing their tax liability or providing cash refunds.

R&D tax credits vary by country, but they generally apply to expenses related to the development of new products, processes, or technologies.

In many cases, companies can claim R&D tax credits even if their research and development projects are not successful. This is because the focus is on the effort and investment made, rather than the outcome.

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In the UK, to be eligible for R&D tax credits, a company must be engaged in projects that seek to achieve scientific or technological advancement through the resolution of scientific or technological uncertainties. The project must also meet the following criteria:

  1. It must be aimed at making an advance in overall knowledge or capability in a field of science or technology.
  2. It must involve a systematic or investigative approach to the resolution of scientific or technological uncertainties.
  3. It must involve the creation of new or improved products, processes, materials, devices or services, or the significant improvement of existing ones.
  4. It must involve a level of technological uncertainty that cannot be easily resolved by a competent professional in the field.

Examples of qualifying R&D projects in the UK include developing new products, improving existing products, developing new manufacturing processes, improving existing manufacturing processes, improving software or hardware performance, developing new materials or chemicals, or improving energy efficiency.

It’s important to note that the qualifying R&D project must be carried out by the company claiming the credit and must not be subcontracted out to another company. Additionally, certain expenses, such as routine testing, market research, and data collection, are not eligible for R&D tax credits.

In the UK, several types of expenses can be included in the calculation of R&D tax credits. These can include:

  1. Staff Costs: Salaries, wages, employer’s NIC, and employer’s pension contributions for employees directly engaged in the R&D project.
  2. Consumables: The cost of materials and utilities that are consumed or transformed during the R&D process, including power, water, fuel, and software licenses.
  3. Equipment: The cost of acquiring, leasing, or renting equipment and machinery directly used in the R&D project.
  4. Subcontractors: Costs incurred by hiring subcontractors to carry out R&D activities on behalf of the claiming company.
  5. Prototypes: The cost of creating and testing prototypes, including the materials, and overheads.
  6. Clinical Trials: Costs incurred while carrying out clinical trials in the development of pharmaceutical and biotech products.

It’s important to note that these costs must be directly linked to the R&D project being claimed and must not include any expenses that are unrelated to the project. Additionally, any expenses that have been reimbursed or received grant funding cannot be included in the R&D tax credit claim. It’s also important to maintain accurate records of all expenses related to the R&D project to support the claim.

In the UK, there are two main types of R&D tax credits available: SME R&D tax credits and R&D Expenditure Credit (RDEC).

SME R&D Tax Credits:

SME R&D tax credits are specifically designed for small and medium-sized enterprises (SMEs) and are more generous than RDEC. To qualify as an SME, a company must have fewer than 500 employees, a turnover of less than €100 million, or a balance sheet total of less than €86 million.

SME R&D tax credits allow companies to claim up to 33.35% of their eligible R&D expenditure as a tax credit or a cash payment, regardless of whether the company is profitable or not. This means that if a company spends £100,000 on qualifying R&D activities, it can claim up to £33,350 in tax relief or cash back.

R&D Expenditure Credit (RDEC):

R&D Expenditure Credit (RDEC) is designed for larger companies or those that don’t meet the SME criteria. The RDEC scheme replaced the previous Large Company Scheme (LCS) in April 2016.

Under RDEC, companies can claim up to 13% of their eligible R&D expenditure as a tax credit, which is deducted from their corporation tax liability. Unlike SME R&D tax credits, RDEC is not payable as a cash payment and can only be used to offset corporation tax liabilities.

Both SME R&D tax credits and RDEC can be claimed by companies engaged in qualifying R&D activities. However, the amount of relief available and the way it’s claimed differs based on whether the company is an SME or a larger company.

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The Counting King R&D Tax Credits Process

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R&D TAX CREDITS CALCULATOR

Find Out How Much You Can Claim With Our FREE Research and Development (R&D) Tax Credits Calculator. You can even get the calculation emailed to you for future use.

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  1. Identify qualifying R&D projects: Determine which R&D projects meet the eligibility criteria for claiming R&D tax credits.
  2. Calculate eligible R&D expenditure: Calculate the eligible R&D expenditure incurred in each qualifying project.
  3. Prepare the R&D tax credit claim: Prepare a comprehensive R&D tax credit claim that includes details of the qualifying projects, eligible expenditure, and any other relevant information required by HM Revenue and Customs (HMRC).
  4. Submit the R&D tax credit claim: Submit the claim to HMRC either as part of the company’s corporation tax return or separately.
  5. Receive the R&D tax credit: If the claim is approved, the company will receive the R&D tax credit as a reduction in their corporation tax liability or as a cash payment.

It’s important to maintain detailed records of all eligible R&D expenditure and the activities carried out in each qualifying project to support the R&D tax credit claim. Companies should also ensure that they comply with all relevant legislation and guidance issued by HMRC when claiming R&D tax credits.

In the UK, there are two main ways in which a company can receive R&D tax credits:

  1. Reduction in corporation tax liability: The R&D tax credit can be used to reduce the company’s corporation tax liability for the financial year in which the claim is made. For example, if a company’s corporation tax liability for a particular year is £100,000 and they make an R&D tax credit claim for £30,000, the company’s corporation tax liability for that year will be reduced to £70,000.
  2. Cash payment: If the company has no corporation tax liability or is in a loss-making position, it can surrender the R&D tax credit for a cash payment. For example, if a company’s corporation tax liability for a particular year is £0 and they make an R&D tax credit claim based on £100,00 worth of expenditure, the company could receive a cash payment of up to £33,350.

It’s important to note that the amount of R&D tax credit a company can receive depends on various factors, such as the size of the company, the type of R&D project, and the eligible expenditure. Additionally, the company must meet the eligibility criteria and provide accurate and detailed information to support the claim.

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