Essential Guide to R&D Tax Credits

Do you want to claim R&D tax credits?

Here, you’ll learn exactly how to grow your business with a government incentive that rewards innovative UK companies.  

This new guide will cover the essential aspects of R&D tax relief, including:

• Eligibility
• Qualifying expenditure
• SME and RDEC schemes
• Calculating entitlement
• Claim process
• Choosing specialists
• Lots more

Research and development tax credits are a business incentive where companies operating in the UK are rewarded for their spending on R&D activities.  

The research and development (R&D) tax credits scheme was set up in 2000 and is a vital Government incentive, supporting individual businesses and helping the UK economy to grow through innovation.

The scheme has improved significantly since its inception, with the rate of relief increasing consistently and restrictions being relaxed.

According to HMRC over £4.3bn was claimed last year, corresponding to £31.3bn of R&D expenditure. 48,635 R&D tax credit claims were made for 2017-2018 (latest statistics). 

Regardless of the outcome of an R&D project, the scheme allows companies to claim up to 33% of the R&D expenditure as Corporation Tax reduction or as a cash payment as long as you’ve paid some tax, either Corporation Tax, or PAYE/NIC.

Read more: Is R&D Tax Relief Too Good To Be True?

Put simply the scheme enhances your development costs, reducing the profits you declare and therefore the amount of Corporation Tax you pay.  So the value of the scheme is in the tax saving you make.  

You’re able to claim for the last two financial years and so if you haven’t made a claim before you should be able to get a cash refund for those years. If your company has already paid the tax, then you’ll receive a rebate from HMRC. 

The scheme also benefits loss-making companies with either increased future tax savings or a payable tax credit. 

Once you’ve made your initial claim you can also keep using the scheme every year (as long as you’re doing eligible work) to reduce your tax liability going forward.

The potential benefit varies depending on the level of R&D investment, Corporation Tax paid and whether the company is an SME or a Large Company. 

Any limited company from any industry, whether profitable or loss-making, can benefit. As long as it is doing eligible work such as developing new products, technology, processes or services. 

HMRC use this fiscal lever as a tool to stimulate investment in innovation in 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 and 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 6 – 8 weeks for you to receive funds once your claim is approved;
• You can claim on R&D activities for the current and previous two financial years and receive between 8.4p and 33p per pound spent on development;
• Funds can be used in any way you see fit, many reinvest proceeds into further R&D;
• 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 will be flagged by HMRC which may result in audit and decline;
• Doesn’t apply to Limited Liability Partnerships (LLPs) and charities;

HMRC defines eligible R&D activities as work that leads to an advance in science or technology. This may sound daunting, though it’s wider than you might think. 

Companies overcoming technical uncertainties, companies significantly improving existing products, and companies combining existing components in brand new systems are all examples of eligible work for R&D tax relief.

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

• Developed or prototyped a new product or device;
• Developed or improved software;
• Spent money on R&D project;
• Be a qualifying UK based company;
• Be subject to Corporation Tax;

If you’re unsure if your business or R&D activities qualify for tax relief, take this online R&D Tax Eligibility Quiz. 

TAKE ELIGIBILITY QUIZ

Overcoming technical problems, improving existing products, or combining existing components into new systems can all be eligible work for R&D tax credits. 

This includes making something more efficient, adding more functionality, scaling it up, reducing its cost or its environmental impact.  

Knowing which projects and activities actually qualify for R&D tax relief is the area where most companies are looking for advice. This is important to maximise the claim value. 

It is not necessary for work to have been successful, so long as the aim would have been to achieve an advance. R&D is by its very nature risky and doesn’t always succeed, so the effort taken trying to succeed can be included. Things that relate to qualifying indirect activities are also considered as R&D.

The costs that can be used include staff costs (gross employment costs), consumables such as materials and equipment, overheads such as heat, light and power, and finally subcontracted support, although this is claimed at a lower rate. Other costs such as support staff, administrative or clinical staff may still qualify for indirect R&D activities.

Read more: R&D Tax Relief Expenditure: Dividends, Salary and Bonuses?

What CAN be claimed for:

• Utilities (Gas, water)
• Salaries
• Wages
• Consumable item
• Prototypes
• Subcontractors
• Software
• Pension fund

What CANNOT be claimed for:

• Rent
• Travel expenses
• Dividends
• Recruitment
• Production and distribution
• Capital expenditure*
• Cost of land
• Patent and trademarks

*We can help you maximise your R&D tax relief entitlement with the Capital Allowances scheme.

SME

Companies classed as an SME are able to deduct an extra 130% of their qualifying costs from yearly profit, in addition to the normal 100% deduction which adds up to a total of 230% deduction. 

Tax relief can help SMEs support their continuing R&D activities. If a company is loss-making, in certain circumstances they can surrender their losses in return for an R&D tax credit payment worth up to 14.5% of the surrenderable loss.

RDEC

Large companies can claim RDEC (R&D Expenditure Credits). The RDEC scheme is less generous than the SME scheme, paying up to 11% of their eligible R&D expenditure as a cash payment instead of deduction from taxable profits. 

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

SMEs on the RDEC Scheme

The SME scheme is not available to companies that are receiving any other notifiable State Aids for the same project. In certain situations, SMEs are able to claim via RDEC if they are involved in subcontracted or subsidised research for a large company, or because of a grant or subsidy.

Qualifying eligible expenditure under RDEC without reducing the value by the grant received is a potential way of claiming R&D tax credits.

*There are some exceptions that will require SME to use the RDEC scheme or both to make a claim.

Sector – Manufacturing
Project – Sustainable Packaging

A West Midlands SME produces a range of packaging for perishable food goods. The scientific and technological advance was in resolving the uncertainty in the development of sustainable packaging solutions as an alternative to plastic containers. 

The qualifying R&D activities included staffing expenditure, consumed materials, utilities and subcontracted work.

Their last claim resulted in a payable tax credit of £68,678 and we provide ongoing guidance to them to ensure their efforts are eligible for future claims.

Read more: R&D Tax Relief Case Studies

SME Calculation Example

As a simplified example; If an SME had engineers working exclusively on R&D and paid them of total of £250,000 per year, they could use the scheme to effectively record that cost at £575,000 (230% x £250,000). The additional £325,000 of expenses would mean the company’s taxable profit would go down.
The calculation shows how this affects a profitable company: £49,375 from corporation tax savings and the payable tax credit. In total there would receive back 19.75% of their R&D costs.

If you are not eligible to claim the relief as an SME, you might still be able to claim under the RDEC scheme.

Read More: R&D Tax Credit Calculation Examples

Making the actual claim can be a complex process, which is why R&D tax consultants like us are here to help you. It pays to be aware of all the elements you can claim for so you can maximise your relief amount. 

Our process is simple and there are only 4 steps to successfully complete a claim.

1. Initial call – Usually a short phone call to establish whether work undertaken is eligible for R&D tax activities.
2.  Building an application – Identifying details of all qualifying activities and processes and writing up the technical narrative. 
3. Submission to HMRC  – Providing the tax relief value and completed technical and financial documentation to HMRC.
4.  Receive benefit  – Once the document is reviewed and process by HMRC, you’ll receive your entitlement.

We’ve been successfully claiming for our clients for 11 years and have a 100% success rate. 

Read more: Claiming R&D Tax Credits

To start the claim, you’ll be required to provide supporting evidence that that will allow you to put the claim forward.

All of the above is taken into consideration and required to make the claim process as efficient as possible.

Read more: How Long Does it Take to Claim R&D Tax Credit?

• Project Records – A summary of your undertaken R&D project in the form of a short should be kept to support your claim. With focus on the advances and the uncertainties rather than info about the finished product.
• Expenses Records – A breakdown of the expenses that are eligible for a relief.

• Staff Involvement – Individuals with hands-on technical input on qualifying projects.
• Timing Frameworks – Proportion of time involvement on the project relating to R&D activities.
• UTR – 10 digit company unique tax number.

R&D Tax Experts

• Technical knowledge;
• Understand R&D legislation;
• Advise on R&D capital allowances;
• Payment by results only;
• Professional and fully managed claim process;
• Liaise with HMRC on your behalf; 
• Maximise claim value;

Accountants

• Understand your business structure;
• Payroll pricing;
• General tax and financial knowledge;