R&D tax credits

More than £84 billion of R&D tax relief has gone unclaimed in the UK according to figures from the Treasury.

This is a huge amount, which could revolutionise the financial outlook of thousands of innovative small businesses.

With so much on offer, could your business benefit from this generous tax credits scheme?

What are R&D tax credits?

Research and development (R&D) tax credits were launched by the Government to reward companies in the UK that invest in innovation.

These tax credits are a valuable, if underutilised, source of support to help businesses invest in R&D, hire new talent and grow.

How do they work?

Developed new products, processes or services or Enhanced existing ones

Claiming R&D tax credits against these developments provides either a reduction to Corporation Tax or cash if the development leads to a loss.

Unfortunately, there is a perception that this relief is only on offer to those working in high-tech sectors, but this couldn’t be further from the truth.

In fact, this initiative is open to businesses in almost every sector as long as they can prove they have made an advancement. HMRC have received successful claims in several sectors including:

Retailers
Professional Services – e.g. Solicitors
Charities
Waste Management and Recycling
Web Design
Software
Farming

Within the scheme’s accepted research and development definition, R&D doesn’t even have to have been successful to qualify and you can also include work undertaken for a client.

Am I eligible for R&D tax credits?

In order to benefit from R&D tax credits, you must:

Be a UK limited company that is subject to Corporation Tax.

Have completed qualifying research and development activities.

Have spent money on an eligible project.

Have incurred qualifying expenditure.

Depending on whether you are a small to medium-sized enterprise (SME) or large company, the scheme that you apply for can differ.

The scheme classifies a business as an SME if it has fewer than 500 team and either not more than €100 million turnover or €86 million gross assets.

Any business with more than 500 members of team or either more than €100 million turnover or €86 million gross assets is classed as a large business.

SMEs must apply for the SME R&D tax credit scheme, while large companies can apply for Research and Development Expenditure Credit (RDEC) – although where an SME works alongside a large company on R&D, they may be able to claim Research and Development Expenditure Credit or even both schemes.

Please note that If a company receives a non-project specific grant which is Notified State Aid then it cannot claim for any relief under the SME scheme.

SMEs that are considering applying for a grant which is Notified State Aid, should ensure their grant application is for a specific project, so that any other R&D projects undertaken remain eligible for SME relief.

What’s the difference?

SMEs can claim up to 33p for every £1 spent on qualifying R&D activities.
Large companies can claim up to 11p for every £1 spent on qualifying R&D activities.

If a company receives a notifiable state aid in the form of a grant, they are not eligible for the SME scheme but can use RDEC, therefore, an SME receiving a grant for work with a large company will have to go for RDEC.

Calculating the claim

The amount of relief a business receives depends on its R&D spend and a number of other factors.

In order to calculate the R&D tax credit, a business will need to identify qualifying expenditure and look at the relevant rate for the business in order to create a calculation for your enhanced expenditure.

The actual amount of expenditure claimed under R&D tax credit scheme, once corporation tax is taken into consideration, is shown below:

When you deduct your enhanced expenditure from your taxable profits or add it to your loss, it will result in one of three outcomes:

a Corporation Tax reduction if you are profit-making
a cash credit if you are loss-making
or a combination of the two.

Businesses should be aware that expenditure is only enhanced under the SME scheme but not RDEC.

What costs qualify for R&D tax credits?

When submitting an R&D tax credit claim there is a wide variety of expenditure that can be covered. To help you make the most of this incentive please click on the headings below.

Employment

SME’s and large companies can claim Employment costs, such as:

Gross salaries (including wages, overtime pay and cash bonuses);
Employer NI contributions;
Employer pension contributions; and
Certain reimbursed business expenses.

However, benefits in kind, such as health insurance or a company vehicle are excluded as are director dividends.

Employees rarely spend all their time on R&D, so you will need to determine the appropriate apportionment of staffing costs to include in your R&D claim.

Subcontracted R&D

You may be able to include the cost of subcontracted R&D work, however, the amount and what can be claimed differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme.

For example, if you are making an SME claim, you can include 65 per cent of payments made to unconnected parties.

The rules in relation to Subcontracted R&D are complex so it is best to seek advice in advance.

Externally Provided Workers (EPWs)

Externally provided workers (EPWs) such as agency staff, contractors, and freelancer that are brought into the team to support with R&D are allowable expenditure.

However, they must work under the supervision, direction, or control of the company claiming credits.

Consumable items

Materials that are consumed or transformed in your R&D process are defined as consumables and can include basics such as water, fuel, and power.

Once your work to resolve the technological or scientific uncertainty is completed any additional costs for consumables that could be involved in further development or marketing should not be included in a claim.

Software

Expenditure on computer software involved directly in R&D activities may be included, as can software partly used for R&D – at a reasonable apportionment.

This tax credit applies to the two previous accounting periods. If you have already completed work in the last couple of years you may still be eligible to apply.