Research and Development (R+D) Tax Credits Explained
Making R+D Claims and What You Need To Know!
Are you wondering if you can claim for Corporation Tax relief on the Research and Development (R&D) project/s of your company?
R&D tax credits can help in transforming your business by rewarding innovation and developing growth.
What is R&D (Research and Development) Tax Credits?
Research and Development (R&D) Tax Credits are a type of UK government tax incentive primarily used for motivating companies to make an investment in R&D. This is designed to reward companies who are investing in innovation. In fact, they are a crucial source of cash for companies who want to invest in R&D. These funds can be used in hiring new workers and ultimately in growing your business.
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Companies are given the chance to claim payable cash credits or decrease their tax bill as a part of their R&D expenditure.
History of Research and Development (R&D) Tax Credits
It was in 2000, when this particular scheme was first introduced for small and medium enterprises (SMEs). In 2002, a different scheme for large companies was introduced. All companies can qualify for the relief as long as they are carrying out R&D. There is a wide variety of definitions when it comes to identifying the eligible costs and eligible R&D. Most often, R&D activities can take place in different ranges of company operations.
Before this UK scheme had started, it was already implemented in a lot of countries worldwide such as in France, Canada, and the USA. It was aimed to encourage corporate R&D investment.
The UK government desired to expand the UK R&D base so they can help in reducing the cost of corporate R&D and therefore inspire companies to make an investment in R&D. As a result, this can help in increasing innovation and enriching the economy. Generally, there are two major types of R&D incentive structures. These are volume-based and incremental-based. In volume-based, the credit will be dependent on the absolute volume of R&D expenditure. In incremental based, the credit will be based on the R&D spending over a specific base figure.
The UK scheme is volume-based since the incremental methodology offers limited or no encouragement to companies whose R&D spending changes or stays at a steady level, for instance, when there is macro-economic volatility.
What Is Research and Development (R&D) Relief?
The aim of Research and Development (R&D) reliefs is to provide support to companies that are working on innovative projects, particularly those that are related to science and technology. A wide range of companies can claim this relief as long as they are making research or developing advancement in their specific fields. Companies are even allowed to make a claim on unsuccessful projects.
The most important thing to remember is you are only capable of claiming Corporation Tax relief if your project satisfies HMRC’s definition of R&D.
How Much Can Be Claimed?
The net benefit after tax that the companies can obtain from the relief can range from 7.7% to 32.63% of eligible expenditure. However, this will be dependent whether your company is small or large and whether it is loss making or profitable. There are several factors to consider in classifying whether your company is small or large. This includes the number of employees, revenues, as well as balance sheet assets.
The SME scheme works by permitting the SME to make an additional deduction of 130% of its eligible R&D expenditure from its taxable income. In case the company is loss-making, then the scheme offers more by allowing an alternative of a cash payment of up to 32.63% of the eligible R&D investment. The enhancement rate for SME R&D tax credit has risen. When it was first launched in 2000, the rate was 150%. But in 2013, the rate increased to 225%.
In 2014, the Chancellor of the Exchequer revealed that the SME relief has been increased from 225% to 230%. This is applicable for R&D expenditure acquired from April 1, 2015, providing companies with a benefit of 26% of the qualifying expenditure. For loss-making companies, under the SME scheme the rate used for payable tax credit remains at 14.5%. This means that they can obtain a cash credit of 33.35% for every pound spent on any qualifying R&D. Take note that previously, the rate was 32.63%.
For large companies, they are capable of claiming an additional 30% of its eligible R&D expenditure from its taxable income. In 2013, the Research and Development Expenditure Credit (RDEC) was launched by the government. With the RDEC scheme, large companies are allowed to make a claim of a payable tax credit at a rate of 10% of qualifying expenditure. On April 1, 2015, the rate was increased to 11%. Furthermore, it was increased to 12% starting from January 1, 2018.
For more details on payable credit rates and tax deduction, you can visit the website of HMRC.
It is estimated that the cost of the entire scheme is £1.3 billion per year in terms of corporation tax revenues.
As of 2013, approximately 100,000 claims have been accomplished and more than £9.5 billion of relief has been claimed ever since the R&D tax credit scheme was first introduced. Under the SME scheme, over 28,000 various companies have filed for claims. On the other hand, under the large company scheme, nearly 7,500 companies are making a claim.
How Much Is the Worth of an R&D Tax Credit Claim?
The computation of your R&D tax credits will be dependent on your R&D expenditure. Before you can compute your R&D credit, you have to recognise first your qualifying expenditure and enhance it using the relevant rate. This can result in an enhanced expenditure.
When the enhanced expenditure is subtracted from your taxable profits, or in case your company is loss-making, when the enhanced expenditure is added it to your loss, the result will be:
- A cash credit if your company is loss-making.
- A Corporation Tax reduction if your company is profit-making.
- Or it can be a combination of both.
R&D (Research and Development) Tax Credit Rates
For SMEs, on any of their qualifying R&D activities, they are able to make a claim of up to 33p for each £1 spent on these activities. In the year 2018-2019, SMEs in the UK has made an average claim of £57,228. On the other hand, on any qualifying R&D activities carried out by large companies, they are allowed to claim up to 11p for each £1 spent on these activities. Also, in the year 2018-2019, in the UK, large companies were able to make an average claim of £632,931 on RDEC.
How Do R&D Research and Development) Tax Credits Work?
If your company is spending money to create new products, services, or processes or perhaps to improve the existing ones, then you can be eligible for R&D tax relief. If your company spends money for innovation, then you’re allowed to make an R&D tax credit claim so you can obtain cash payment for the expenditure and/or reduction in Corporation Tax. The scope for recognizing R&D is quite vast. In fact, it can be found in different sectors. Also, if it is your first time to make a claim, then you can generally make a claim for the last two completed accounting periods.
When claiming relief, there are different principles that should be considered. R&D is only considered eligible if:
- The project is seeking to accomplish an advance in science or technology.
- It should be subject to technological or scientific uncertainty.
- The work should be done in a systematic and thorough manner.
Costs that are considered as eligible include software, consumable costs, staffing costs, research contributions, and subcontractors. It is critical that these costs should be related to the eligible activities.
Is My Company Eligible For R&D Tax Credits?
In order to take advantage of R&D tax incentives, you must be able to meet the following conditions:
- You are a limited company in the UK and liable for Corporation Tax.
- You have spent some money for Research and Development projects.
- You have worked on qualifying research and development activities.
Who Can Qualify For R&D Tax Credits?
R&D can occur in different sectors, from construction, chemical engineering to digital development, telecommunications, and so much more.
What Could Count as R&D (Research and Development) Activities?
The government’s criteria for R&D is quite broad. Regardless of what is the size or sector of your business, if your company takes risk in trying to resolve technological or scientific uncertainties then you might be carrying out qualifying activity. For instance, if your company is involved in:
- Making new products, services, or processes.
- Making changes to existing products, process or service.
In case you are not absolutely sure that your project could be attainable, or you don’t have any idea how you can accomplish it normally, then it is possible that you want to resolve technological uncertainties and are working on a qualifying R&D project.
Within the government’s acknowledged definition for Research and Development, R&D does not have to be successful in order to qualify.
What Costs Could Qualify For R&D Tax Credits?
There is a wide variety of costs that could qualify for R&D tax credits. This includes:
- Some types of software.
- Salaries of staff including their pension contributions, employer’s NIC, and reimbursed expenses.
- Payments to the subjects who are used for clinical trials.
- Freelancers and subcontractors.
- Materials and consumables such as power, light, and heat which are used in R&D process.
The costs that can be claimed will start from the date that you have worked on your project until the time that you have discovered or developed the advance or if the project has been hindered.
It is possible that you are using software on your R&D project. If so, then your company can make a claim for the licence fees of the software as well as proportion of the costs for the software if it was partly used by your R&D activities.
These are intended for those staff working on the R&D project. Your company will be allowed to claim a proportion of your staff’s wages, salaries, pension fund contributions, and National Insurance Contributions.
Although, you are also permitted to claim for the support of administrative staff who have been working directly on the project. For instance, human resources who recruited the staff who will work on the project. However, you will not be able to claim for the maintenance work or clerical work that were accomplished such as handling the payroll.
You can also claim 65% of the significant payments provided to an external agency if they provided you with employees for the project.
Clinical Trials Volunteers
If you are in the pharmaceutical industry, then you can make a claim for the payments that you’ve made for the participants in your clinical tests as long as it involves R&D projects.
What Are the Costs That Cannot Be Claimed?
There are also some costs which companies won’t be able to claim even if they are carrying out R&D activities. This includes the rent or rates, the fees for the trademarks and patents, the cost of land, the capital expenditure as well as the production and distribution of goods and services.
Figure Out When The R&D Activity Started and Ended
Your R&D activity begins when you start working to resolve the uncertainty. Just ensure that there are no existing solutions that have been worked out.
The R&D activity ends when you have done solving the uncertainty or have stopped working on it. The activity that you are claiming for R&D relief should end after you have already created a working prototype that can solve the problem and prior to starting the production.
After you have begun manufacturing the product, then you might discover another technological or scientific uncertainty. When this happens, you could restart R&D activity again and make a claim for additional R&D while you are trying to resolve it.
You are allowed to claim 65% of the significant costs when a subcontractor is used for your R&D activities.
Companies can also make a claim for the significant proportion of consumable items that are appropriately used for the R&D project. This includes utilities and materials.
How to Claim R&D Relief?
Companies are allowed to make a claim for R&D relief up to two years after the end of the accounting period.
When claiming the relief, you need to complete your full Company Tax Return form (CT600) and enter your enhanced expenditure.
The online service can be used in supporting your claim. When claiming R&D relief the following process should be followed:
- First, you need to evaluate the qualifying R&D activity.
- Compute any qualifying R&D expenditure.
- Complete your full CT600 tax return and submit these figures.
HMRC greatly recommends that there should be sufficient record keeping of eligible costs and eligible activities, in case HMRC might conduct an enquiry. For more information on how to make a claim, you can refer to the guide published on the UK Gov website.
R&D Tax Credits Calculator Your Enhanced Expenditure
When computing your enhanced expenditure, you will be required to:
- Figure out the costs that were directly associated with R & D.
- If you have made any external staff provider or subcontractor payments, then you have to reduce them to 65% of its original cost.
- Calculate the total cost by adding all the costs together.
- Multiply the result by 130% so you can obtain the additional deduction that you need to include into your tax computations.
- Add the amount to the original R&D expenditure figure so you can obtain the enhanced expenditure figure which you will put into your tax return.
If your company is loss-making, then you can decide to surrender this and claim a tax credit.
How Can You Support Your Claim?
To support your R&D tax relief claim, you can send the details to HMRC using their online service.
In using the online service, it is required that you must have a Government Gateway user ID and password. If it is your first time to use the service, then you have to create your user ID.
Prior to using this online service in sending the details to support your claim, be sure that you have already submitted your full Company Tax Return form (CT600).
In case the coverage of your claim is for a period of 12 months or more, then you must submit a separate claim for every accounting period.
What Are the Details That You Need to Include in Supporting Your Claim?
It could be a great help if you provide HMRC with a short summary which offers some explanation on the following aspects:
- How was your project able to overcome this uncertainty?
- Why could your project not easily be carried out by an expert in the field?
- How your project had to overcome technological or scientific uncertainty?
- How your project discovered an advance in science or technology and worked on achieving this advance?
Aside from this, you are also required to submit the following:
- You have to include the details of your qualifying R&D costs.
- You have to submit the overall amount of the tax relief that you are claiming.
- You must also provide your ten-digit company unique tax reference (UTR) number.
- Include also your trading loss that remained unrelieved for the claim period.
- It is important that HMRC must know the start and end dates of the accounting period which is related to the R&D activity. Take note that these dates should be the same as the period covered by your CT600 return.
What Are the Projects That Can Be Considered As R&D?
In order to qualify for R&D relief, you have to make sure that the work is part of a particular project that seeks advancement in science or technology. The project should not be within the theoretical field including pure maths or within social science such as economics.
Make sure that the project is associated with your company’s trade. You could either refer to an existing project or a start-up project that you want to set up based on the outcome of the R&D.
When claiming for R&D relief, there are some things that you need to explain such as:
- How the project attempted to overcome the uncertainty?
- How did the project overcome uncertainty?
- How the project searched for an advance in science and technology?
- Why could an expert in the field not carry out the project?
The project must be involved in researching or developing a new project, process, or service or in improving the existing one.
Advancements in The Field
The objective of your project should be to develop an advancement in the entire field, not simply for your business. In other words, an advancement should not be only about the existing technology that has been present for the first time in your field.
The product, process, or service can still be considered as an advance in case it has been developed by another company however it was not publicly exposed or available.
Demonstrate That It Cannot Be Worked Out Easily by A Professional
Be sure to make an explanation on why a professional will not be able to easily work out your advance. This can be done by illustrating that other attempts in finding a solution were a failure.
Also, you can demonstrate that the people who are carrying out the project are experts in that particular field and get them to make an explanation on the uncertainties involved.
Demonstrate There Was Uncertainty
Technological or scientific uncertainty can be present when a professional on the subject won’t reveal if things can be technologically possible or how it can be accomplished, regardless after referencing every available evidence.
In other words, those professionals in the field or your company could not have known about the advance or how this can be achieved.
Give an Explanation on How You’ve Tried to Overcome the Uncertainty
Be sure to demonstrate that R&D required some research, verification, and evaluation to develop it.
You have to be able to give an explanation on the work that you did to confront the uncertainty. Simply write an explanation of the successes and failures that you had experienced while doing the project.
Types Of R&D Relief
There are various types of R&D relief, most likely this will depend on the size of the company as well as if you were chosen to subcontract the project or not.
What R&D Tax Credit Incentive Fits for My Business?
The type of incentive you use in making a Research and Development tax credit claim will likely depend if your company is classified as an SME or a large company.
For R&D tax credit purposes, if you are categorised as an SME, then you have to make a claim via the SME R&D tax incentive. On the other hand, if you are a large company, then you will make your claim through the Research and Development Expenditure Credit (RDEC).
However, there are some factors that can prevent an SME from accessing the SME incentive. In other words, you may have to make your claim through RDEC or using both incentives.
SMEs from various sectors can receive millions of pounds each month and this amount can be re-invested back into their business. You can make use of grant funding and R&D tax credits simultaneously by using both incentives to guarantee maximum value.
SME (Small and Medium Sized Enterprises) R&D Relief
You are allowed to make a claim for SME R&D relief as long as you are a SME and you have satisfied the following conditions:
- The employees in your company should be less than 500.
- The balance sheet total of your company should be below 86 million euros, or your turnover is below 100 million euros.
Most companies, including start-ups, belong in this category.
Additionally, in order to fit within the SME definition, your company should remain below the staff headcount ceiling and at the same time at least one of the turnovers and balance sheet total ceilings must fall below. In case your company does not meet these conditions, then you will not be considered as an SME. Instead, you can make a claim under the Large Company R&D Tax Relief scheme. Most companies prefer the SME scheme since it is widely known as being more generous since it provides up to 230% of R&D tax relief on qualifying costs as opposed to the Large Company Scheme which only offers about 130% relief.
If you are an SME and you have external investors, then this can influence your SME status. You may be required to include the figures of your partner companies and connected companies when you are working out on your project.
You are not allowed to make a claim for SME R&D relief if you have been subcontracted by another company or if the project has already obtained notifiable state aid. Nevertheless, you can still make a claim for R&D Expenditure Credit (RDEC).
With SME R&D relief, companies are allowed to do the following:
Make a deduction of an additional 130% of their qualifying expenditure from their yearly income, but at the same time, they can still apply the regular 100% deduction, hence, the overall deduction would be 230%.
In case the company is loss making, then they can claim a tax credit of up to 14.5% depending on their surrenderable loss.
In order for an SME to make a claim on the relief, they must prove that their project meets HMRC’s definition of R&D.
Companies who are first time R&D claimers could also qualify for Advance Assurance. In case Advance Assurance is approved, then any R&D claims made during the first three accounting periods will be allowed as long as they meet the requirements.
If you have any connected companies, then the staff, balance sheets, and turnover must be included in your total.
Your company might be connected to another company if it has total control of more than 50% of the voting rights in another company. Alternatively, if another company has total control of more than 50% of the voting rights in your company.
It is considered that you have a partner company if another company has controlled more than 25% of your voting rights or capital. Conversely, if you are holding over 25% of another company’s voting rights or capital.
In case you have partner companies, then you have to include their staff, balance sheets, and turnover. However, this will be dependent on the percentage of capital and voting rights that links between the two companies. For instance, if you own 25% of another company then you should include 25% of its staff, balance sheets, and turnover when computing if you are an SME.
Research and Development Expenditure Credit (RDEC)
Your company can be classified as a large company if you have 500 staff or more. Additionally, either your gross assets should be €86 million, or your turnover should be more than €100 million.
Research and Development Expenditure Credit (RDEC) is a replacement relief for the previous large company scheme.
Large companies are allowed to claim Research and Development Expenditure Credit (RDEC) in case they are working on R&D projects.
Although this type of relief can also be claimed by SMEs and large companies who have been chosen to subcontract and carry out R&D work by a large company.
The RDEC is a certain type of tax credit. Up to December 31, 2017, it was computed as 11% of your qualifying R&D expenditure. However, this value was increased to 12% between January 1, 2018 to March 31, 2020. And on April 1, 2020, it was again increased to 13%.
The Benefits of R&D Tax Credits
R&D tax credits is a type of innovation funding which can greatly help in transforming your business. Innovative companies can take advantage of R&D tax incentives so they can grow. The benefits of this incentive are wide-reaching.
The government can also take advantage of increased productivity which is good news for the economy and good news for UK businesses. This can lead to innovation which can result in positive change on a global scale.