R&D Tax Credits Explained
What is an R&D tax relief scheme?
Research and development (R&D) tax credits are government incentives designed to reward UK companies that invest in innovation. The innovations can be, developing new products, processes or services; or enhancing existing ones.
By the end of 2020, over 82000 companies in the UK claimed over £7.4 billion from HMRC in tax relief for their R&D projects. These numbers are predicted to snowball over the coming years. The tax credit can come either as a cash payment and/or a corporation tax reduction and can be used to increase R&D development or hire staff to accelerate business growth.
Goodwille recently organised a webinar together with experts on the subject; GovGrant:
What is R&D for business, and which projects count?
Many people understand what R&D stands for, but it is essential to understand the definition of research and development for a business. Essentially, research and development are activities that result in the invention of new products, processes, or services or improvements to existing ones. In addition, these activities must further provide a sort of benefit to the industry, the customer or the company.
R&D relief is available only when the work is part of a specific project that advances science or technology. Therefore, it cannot be an advance within a social science – such as economics, or a theoretical field, such as mathematics. Additionally, the research project must be related to your company’s trade – it can either be an existing project or one you intend to start based on the research findings.
R&D projects often contain unknowns and uncertainties at their core, and the R&D aims to resolve them. This uncertainty forms a core aspect of the definition of R&D for tax purposes.
How does a company qualify for R&D?
There are different types of R&D relief, depending on the company’s size and whether the project has been subcontracted or not. In a nutshell, the company needs to be a UK Subsidiary, have a complete set of accounts for year one and have the time and money spent on R&D in the financial statements.
In addition, to get R&D relief, you need to explain how a project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be easily worked out by a professional in the field
Types of R&D relief Schemes
Small and medium-sized enterprises (SME) R&D Relief
This scheme allows companies to:
- subtract an extra 130% of their qualifying costs from their yearly profit, as well as the standard 100% deduction, making a 230% reduction in total
- claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss
Which companies can claim SME R&D tax relief?
A company can claim this scheme if:
- the company is classed as an SME
- the company has less than 500 staff
- the company has a turnover of under €100m or a balance sheet total of under €86m
Research and Development Expenditure Credit (RDEC)
This scheme replaced the “Large Company Scheme” and was introduced for large companies in April 2016. This scheme allows companies to get an RDEC rate of 13% of net Corporation Tax (worth 11p for every £1 spent)
Which companies can claim RDEC?
A company can claim this scheme if:
- the company is classed as a large company
- the company has more than 500 staff
- the company have a turnover of more than €100 million and more than €86 million in gross assets
The benefits of R&D Tax Relief
R&D often leads to a new type of product or service, which in most cases generates new income. In addition, it can lead to improved internal processes, most often productivity strategies, with the overall aim to reduce marginal costs.
Further, companies can gain a competitive advantage by performing in ways their rivals cannot easily replicate. For instance, if R&D efforts lead to an improved business process, cutting marginal costs or increasing productivity.
What is the process of claiming R&D?
The process to claim R&D tax credits can be fairly complex, and those unfamiliar with the process could miss out on the full extent of tax reimbursements. Therefore, we recommend reaching out to us at Goodwille so we can introduce our trusted specialist partner GovGrant that can help maximise the claim on your behalf.