What are R&D Tax Credits?

Research and development tax credits is an incentive where UK Limited companies can receive a reduction or rebate on their corporation tax for monies spent on eligible R&D activities.

The research and development (R&D) tax credits incentive was established by the Government in 2000, supporting businesses of all different sizes to grow and helping the UK economy to grow through innovation.

In Autumn 2020, HMRC released the latest statistics for the latest financial year reported (2018-2019) as of 30th June 2020:

  • 59,265 R&D tax credit claims were submitted, 52,160 are in the SME R&D scheme.
  • £5.3bn of R&D tax relief support has been claimed, corresponding to £35.3bn of R&D expenditure.
  • With an average claim size of £89,429.

It is believed that despite the incentives huge growth and significant improvement since its inception (with the rate of relief for both SMEs and Large Companies increasing consistently and restrictions being relaxed), up to 90% of eligible companies have still not begun claiming R&D Tax Credits.

In the same Autumn 2020 statistics, HMRC released the final statistics for the financial year reported (2017-2018):

  • 62,095 R&D tax credit claims were submitted, an increase of 17% from 2016-17. The increase was primarily driven by a rise in the number of SME claims, which totalled 54,005 in 2017-18, an increase of 19% from 2016-17.
  • £5.1bn of R&D tax relief support has been claimed, an increase of 15% from the previous year. This corresponds to £36.5bn of R&D expenditure, an increase of 8% from the previous year.
  • With an average claim size of £82,132.

Whether the eligible project has been completed, ongoing, or failed, the incentive allows companies to claim up to 33% of the R&D expenditure. Dependent on the company’s tax position before including R&D, the company can receive their benefit as a Corporation Tax reduction or as a cash payment as long as you’ve paid some tax, either Corporation Tax, or PAYE / NIC.

  • £34bn

    Total R&D expenditure

  • 90%

    UK eligible companies don’t claim

  • £89,700

    Average R&D tax relief claim

What counts as R&D?

HMRC’s R&D criteria is purposely broad to enable companies of all different sizes and sectors to benefit from the incentive if you are taking a risk by attempting to ‘resolve scientific or technical uncertainties’. This could include:

  • Creating new products, processes or services

  • Changing or modifying an existing product, process or service

If you’re unsure if your project is viable, or if you could theoretically achieve it but are unsure how to complete it in practice, you could be resolving technological uncertainties and be carrying out qualifying R&D.

Within HMRC’s research and development definition, eligible R&D projects doesn’t have to have been successful to qualify. You can also include work undertaken for a client, as well as your own projects.

How do R&D tax credits work?

Put simply the incentive enhances your eligible project costs, reducing the company’s profits that are declared and therefore the amount of Corporation Tax you pay. So, the value of the incentive for profit-making companies is in the tax saving you make. For loss-making companies, you can claim a R&D tax payable credit by surrendering losses @14.5%, offering up to a 33% return on your investment in R&D.

You’re able to submit an R&D claim for the last two financial years as it follows the amendment window of the company’s CT return, this means if you haven’t made a claim before you should be eligible for a tax repayment for those years. If your company has already paid the corporation tax, then you’ll receive the overpaid tax as a rebate from HMRC.

The incentive also benefits loss-making companies, giving the option to surrender losses created (up to 230%) at 14.5% or to carry the additional losses credited forward to be used against future profit.

Following the successful competition of your initial R&D Tax Credit claims, you can carry on benefitting from the R&D incentive every year that you are conducting eligible work to reduce your tax liability going forward.

The potential benefit varies depending on the amount invested in R&D, the tax position of the company and whether the company falls into the SME or the RDEC scheme.

Why are R&D tax Credits Important?

  • Any UK Limited company from any industry, whether profitable or loss-making, can benefit from the incentive. As long as it is conducting eligible work such as developing new products, technology, processes, or services. 

    HMRC use this fiscal lever to help stimulate investment in innovation within the UK, which is proven to be key for growth and future economic prosperity. 

    The incentive applies to companies of all sizes, including loss-making ad profit-making companies, and you can claim back as cash the tax you have overpaid in the previous two years. 

Benefits of R&D tax credits

  • The application process is simple. It typically takes around 4-6 weeks for you to receive your benefit once your claim has been submitted to HMRC.

  • You can claim on eligible R&D activities for the current and previous two financial years and receive between 8.4p and 33p per pound spent on development (dependent on the incentive your company falls into).

  • Funds can be used in any way you see fit, many reinvest the benefit back into their business to increase eligible R&D activities and therefore their future claim value.

  • There is no minimum claim value. The requirement to spend at least £10,000 a year on R&D was lifted in April 2012.

  • Eligible for loss-making companies.

  • Boosts the UK economy.

Limitations of R&D tax credits

  • Inaccurate submission / inexperienced accountant may not claim full entitlement.

  • Claiming for ineligible costs or projects will be flagged by HMRC which may result in enquiry and rejection.

  • Only applies to UK Limited companies (excludes Limited Liability Partnerships (LLPs) and charities).

Who is eligible for R&D tax relief?

HMRC defines eligible R&D activities as work that leads to an advance in science or technology. This may seem disconcerting, though its application applies to a wide range of industries and businesses.

If your company is overcoming technical uncertainties, appreciably improving existing products, software, processes (utilising technology or scientific principles), or integrating existing components in brand new solutions then you are eligible R&D tax relief.

“Work that advances overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties, may qualify for R&D relief”

 

HM Revenue & Customs

To be able to claim R&D tax credits, you must meet a few criteria:

  • You have developed or prototyped a new product.

  • You have developed bespoke or continued to improve software.

  • You have spent money on an R&D project.

  • Be a qualifying UK Limited company.

  • Be subject to Corporation Tax.

If you are unsure if your business and/or activities would qualify for R&D tax relief, we’re happy to help. Advice is free and it comes with no-obligation. Get in touch 0161 667 5069.

When does an R&D project start and end?

As part of the claiming process, it is essential to know when a project began and ends to ensure that you are claiming the right amount of tax credits. Finding specific dates can be challenging but it is of course beneficial to capture all relevant activity.

  • Project start

    The project starts when work to resolve the uncertainties begin.

  • Project end

    A project ends when that technical uncertainties is resolved or the work to resolve it ceases.

  • Post-Project

    R&D can take place even after production starts when additional technical uncertainties arise.

  • 1. Concept

    Commercial / Scientific / Research.

  • 2. Study

    Resolving (qualifying) uncertainty.

  • 3. Intellectual Property

    Patents / IP Protection.

  • 4. Designing

    Qualifying Design & Modelling, only if it is helping to overcome an uncertainty in the project.

  • 5. Prototyping

    Pre-production development.

  • 6. Testing

    Trials & Surveys.

  • 7. Improvement

    Changes & Tweaks.

  • 8. Manufacturing

    Production and distribution.

  • 9. Post-R&D

    Post production R&D.

What qualifies in my sector?

We enable companies of different sizes, structures and sectors to access tax relief against the costs derived from research and development activity.

  • Engineering

  • Construction

  • Pharmaceutical

  • Electronics

  • Software and Technology

  • M&E services

  • Manufacturing

  • Food and Drink Manufacture

  • Energy Services

  • Transport and Logistics

  • Insurance

  • Financial Services

Which expenses qualify for R&D tax credits?

Direct and externally provided staff, subcontracted R&D, consumables, software, trials, prototyping and independent research costs may all qualify for R&D relief. Capital expenditure does not qualify under this scheme, nor does expenditure on the production and distribution of goods and services.

What can be claimed for:

  • Labour Costs - Salaries, Employer Pension & Employer NI Contributions

  • Sub-Contractor Costs

  • Software Licences

  • Materials & Wastage for prototypes etc.

  • Utilities

What can’t be claimed for:

  • The production and distribution of goods and services.

  • Capital expenditure

  • The cost of land

  • Payments for the use and creation of patents and trademarks, as these are the cost of protecting the completed R&D.

Types of R&D tax credits schemes

  • SME (Small or Medium sized enterprise)

  • Fewer than 500 staff

  • Less than 100 million Euros (turnover)

  • Less than 86 million Euros (assets)

  • RDEC (Research and development expenditure credit)

  • More than 500 staff

  • More than 100 million Euros (turnover)

  • More than 86 million Euros (assets)

  • Received government state aid

  • Received de minimis aid

Still unsure which incentive if right for you?

R&D Tax Credit Calculator

Do you have more than 500 employees and turnover exceeding £100,000?

No

How much have you spent on R&D?

£1,000

What was your profit the same year?

£0

Our upfront fee

Always £0

You could receive a tax credit of

£1,885

Example claim benefit amount

As a simplified example; if an SME had developers working exclusively on an eligible R&D project and paid them of total of £150,000 per year, they could use the incentive record that expense at £345,000 (230% x £150,000). The additional £195,000 of the expenses would mean the company’s taxable profit would be reduced. 

The calculation shows how this affects a profitable company; £29,625 from corporation tax savings and the payable tax credit. In total there would receive back 19.75% of their R&D investment. If you are not eligible to claim the relief as an SME, you might still be able to claim under the RDEC incentive.

SME Sample Calculation

Labour Costs £50,000
Materials & Wastage Costs £50,000
Software Licence Costs £50,000
Utility Costs £50,000
Travel Costs £50,000

£39,375

Potential payment from HMRC

R&D Tax Credit Claims Process

Choosing an R&D Tax Credit Specialist over your Accountant

Companies are sometimes wrongly advised by their accountants that they are not conducting eligible activities. This is understandable as while your accountant tends to boast excellent financial expertise, they may not be fully aware of the nuances of R&D tax legislation or, critically, the advances being sought by your projects.

  • Technical Knowledge across many industries.
  • Extensive knowledge of the R&D Tax Legislation.
  • Payment by result only.
  • Fully managed claim process.
  • Liaise with HMRC’s incentive on your behalf.
  • Maximise claim value.

That is not to say that your accountant’s knowledge of your company and its structure isn’t of vital importance for the process to be conducted as efficiently as possible. This is why we aim to work closely with your accountant throughout the process.

An incorrectly submitted R&D tax relief claim can lead to an HMRC compliance check/enquiry, with the possibility of losing the entire benefit. As R&D tax specialists, we will make sure that only eligible work is included, and we will capture all the eligible costs.

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