What are R&D tax credits?

R&D Tax Credits are a government incentive that was introduced to reward eligible UK Limited Companies with reductions or rebates of corporation tax payable for monies spent on eligible R&D activities.

The R&D Tax Credit Incentive was established by the Government in 2000 and has gained substantial traction in the last few years, supporting innovate businesses of all sizes to continue to grow and remain competitive on the global market.

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.

Claim up to 33% of R&D expenditure

We’ve got you covered!

£34bn
total R&D expenditure

90%
UK eligible companies don’t claim

£55,000
average R&D tax relief claim

What counts as R&D?

Creating new products, processes, or services.

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.

Adapting an existing product, process, or service

Within HMRC’s research and development definition, failed projects can also be eligible under the R&D Tax Incentive. As long as the work carried out on the project is deemed as qualifying activity before the project itself is discontinued, there may be eligible costs to include in your claim.

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 an R&D tax payable credit by surrendering losses @14.5%, offering up to a 33% return on your investment in R&D.

Step 1.
Invest in R&D eligible projects.

Step 2.
Submit a R&D tax Credit claim.

Step 3.
Claim back up to 33%.

Step 4.
Grow your business. (and re-invest in R&D eligible projects for a larger incentive).

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.

How much could I receive?

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 uses 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:

Limitations of R&D tax credits:

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.

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.

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 or improved 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.

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.

1

Project start

The project starts when work to resolve the uncertainties begin.

2

Project end

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

3

Post production-project

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

*Only technical design is eligible, if it is helping to overcome an uncertainty in the project.

What Qualifies in the sector for R&D Tax Credits

Here is what qualifies for R&D Tax Credits

  • Accommodation and Food

  • Admin and Support Services

  • Agriculture, Forestry and Fishing

  • Arts, Entertainment & Recreation

  • Construction


  • Education
  • Electronics

  • Electricity, Gas, Steam and Air Conditioning

  • Energy Services

  • Engineering

  • Financial Services

  • Food and Drink Manufacture

  • Health and Social Work

  • Information & Communication

  • Insurance

  • M&E services

  • Manufacturing

  • Mining and Quarrying

  • Pharmaceutical

  • Professional, Scientific & Technical

  • Public Admin, Defence and Social Services

  • Real Estate

  • Software and Technology

  • Transport and Logistics

  • Water, Sewerage and Waste

Types of R&D Tax Credits Incentives

There are two branches of the incentive; the first covers SMEs (Small and Medium-Sized Enterprises) and the second is for Large Enterprises (LEs).

SME

Companies that fall within the SME incentive are able to deduct an additional 130% of their qualifying expenses from yearly profit, in addition to the normal 100% deduction which adds up to a total of 230% deduction.

The R&D incentive can help SMEs support their continuing and new innovative projects. If a company is loss-making, in certain circumstances they can surrender the losses in return for an R&D tax credit worth up to 14.5% of the surrenderable loss.

SMEs under the RDEC Scheme

The SME incentive may not be available to companies that fall within the SME category if they fall within certain criteria. For example, if they are in receipt of other NSA (Notified State Aid) for the qualifying project(s). In certain situations, these companies will be able to claim via the RDEC scheme if they are involved in subcontracted or subsidised research for a large company, or because of a grant or subsidy.

Eligible expenditure under the RDEC incentive without reducing the value of the grant received is a potential way of claiming R&D tax relief, taking the form of a Research and Development Expenditure Credit.

RDEC (Research and Development Expenditure Credit)

Large companies can claim RDEC (R&D Expenditure Credits). The RDEC incentive is less generous than the SME incentive, paying up to 11% of their eligible R&D expenditure as an Expenditure Credit rather than a deduction of taxable profits.

For loss-making large companies, Expenditure Credits are fully payable but subjected to certain restrictions.

R&D Tax Credit Calculator

The easiest way to calculate your company’s estimated R&D tax relief is by using the calculator.

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

No

How much have you spent on R&D?

£10,000

What was your profit the same year?

£0

Our upfront fee

Always £0

You could receive a tax credit of

£1,885

Please note: This calculator is intended as a rough guide.

Calculation Example

As a simplified example; if an SME had developers working exclusively on an eligible R&D project and paid them a 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 they 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.

This calculator is intended as a rough guide.

Calculation Example

As a simplified example; if an SME had developers working exclusively on an eligible R&D projects 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 they 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

Profit / (Loss) before claim

£30,000

R&D qualifying spend

£150,000

R&D enhanced deduction

£195,000

Profit / (Loss) after claim

(£165,000)

Corporation tax saved

£5,700

Potential payable tax credit

£23,925

£29,625 potential payment from HMRC.

R&D Tax Credits Claim Process

STEP 1: Discovery Meeting

This meeting can be conducted in-person or over the phone. During this meeting, we will talk you through the incentive and establish whether the work your company has carried out qualifies under the R&D Tax incentive. We will also outline our work processes and what you should expect.

STEP 2: Technical Meeting and Report Drafting

We visit your site and interview key personnel to get a full understanding of your businesses operations and gather the technical details of the development work undertaken in the period(s). We will also go through the financial aspect of the claim with your company’s finance function to get up-to-date financial data for analysis.

STEP 3: R&D Benefit Analysis

We analyse all eligible costs and calculate the maximum benefit available based on accurate and up to date data. From here we can explain how much you can expect and in what form you can expect the benefit based on your company’s tax position.

STEP 4: HMRC Processing & Actioning

Following an internal review of the compiled claim, we aim to submit the completed documents to HMRC within 2 weeks of receiving all the required information. HMRC aim to process payable credit claims within 28 days and pay out the benefit. In the event that HMRC require additional information relating the claim before the processing can be completed, we will oversee the process and work with you to answer any additional questions. We also work with Ex-HMRC consultants and IP Lawyers to streamline this process and minimise the impact on your business.

HMRC will process a reduction in liability instantly (once submitted). Payable credits are issued typically within 4 weeks either by cheque or bank transfer

Things you need to support your R&D tax relief claim.

To start the process, we do require certain supporting evidence to be made available to make the claiming process as efficient as possible. The below are examples of the information we require at the start and during the process:

Project Details

Details of the work undertaken during the claiming periods, detailing the advances sought and the technical uncertainties encountered for each of the eligible projects to be kept to support the claim.

Records of costs

A breakdown of the expenses that have been incurred relating to the eligible projects discussed throughout the claim process.

Staff involvement

Personnel with both direct involvement and indirect supporting activities relating to the eligible projects undertaken during the claiming period(s). Timesheets are desirable; however, it can be discussed in more detail with the Analyst team.

Timing Frameworks

Details of the proportion of time involved on each of the eligible projects undertaken in the claiming period(s) relating to eligible activities.

Choosing an R&D Tax Specialist

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.

R&D Tax Experts

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.

Claim with Counting King

Gary Hilton

R&D Consultancy Team

“Our process is simple and easy. We quickly tell you whether you are eligible and if so, we handle all the writing and preparation of your R&D claim and work closely with your accountant to ensure the claim is correctly submitted to HMRC.”