Understanding R&D tax credits
Research and development (R&D) tax credits are a crucial incentive designed to encourage businesses to innovate and invest in new technologies, processes and products. Yet, despite their significance, many businesses either aren’t aware of their potential benefits or aren’t fully utilising them.
We explore what R&D tax credits are, who can claim them, and how businesses can maximise their potential.
R&D tax credits… What are they?
R&D tax credits are government incentives designed to encourage businesses to spend more on R&D activities. They’re available to a wide range of companies, from large corporations to small and medium-sized enterprises (SMEs), regardless of their industry.
Who can claim R&D tax credits?
One of the most common misconceptions about R&D tax credits is that they are only for companies involved in scientific research or high-tech industries. This isn’t the case. Any company undertaking a project seeking to advance science or technology can potentially claim R&D tax credits.
Eligible projects
To qualify for R&D tax credits, a project must meet certain criteria set out by HMRC. It should:
- aim to create an advance in science or technology
- attempt to overcome scientific or technological uncertainties
- not be readily available or easily deducible by a competent professional in the field.
Importantly, these projects don’t need to succeed to qualify. Even if the project fails, the R&D expenditure could still be eligible for tax relief.
How R&D tax credits work
The process for claiming R&D tax credits can seem complex, but it essentially revolves around calculating the company’s eligible R&D expenditure and applying the relevant tax relief. The calculation differs slightly depending on whether the company is an SME or a large business.
R&D tax credits for SMEs
For SMEs, R&D tax credits are particularly generous. To qualify as an SME, a company must have fewer than 500 employees and either an annual turnover under €100m or a balance sheet total under €86m.
R&D expenditure credit for large companies
Large companies that don’t qualify as SMEs can claim R&D tax relief through the R&D expenditure credit (RDEC) scheme. The RDEC offers a credit of 20% of qualifying R&D expenditure, which is taxable, resulting in a net benefit of 15%.Notable changes to the rules The UK Government has announced it will be merging the SME and RDEC R&D tax relief schemes into a single, streamlined scheme from April 2024 (although elements of the SME scheme still remain for R&D-intensive companies in the form of the enhanced scheme).
The HMRC website is regularly updated with relevant information.
Common misconceptions about R&D tax credits
Many businesses miss out on claiming them R&D tax credits due to common misconceptions.
Misconception: The application process is too complex
While the process of claiming R&D tax credits involves detailed documentation and a clear understanding of what qualifies, it’s not as daunting as it seems. Many companies choose to work with specialist who can guide them through the process, ensuring that all eligible activities are identified and accurately claimed.
Misconception: We didn’t achieve our project goals, so we can’t claim
One of the biggest benefits of the R&D tax credit scheme is that it rewards innovation, even when projects don’t go as planned. If your company attempted to resolve a technological or scientific uncertainty, it could still qualify for relief, regardless of the outcome.
How to maximise your R&D tax credit claim
Here are some tips to ensure you’re getting the most out of your claim.
1. Keep detailed records
Accurate and comprehensive records are crucial for a successful R&D tax credit claim. This includes documenting project objectives, methodologies, time spent by staff etc. The more detailed your records, the easier it will be to substantiate your claim.
2. Identify all qualifying activities
It’s easy to overlook certain activities that qualify as R&D. Beyond obvious R&D work, consider whether your company has been involved in process improvements, software development or even trials and testing that attempted to solve scientific or technological challenges. An experienced R&D tax adviser can help identify these activities.
3. Understand the scope of eligible costs
R&D tax credits cover a wide range of costs, not just direct R&D expenses. Qualifying costs can include:
- staff salaries, wages and other associated costs like employer NICs and pension contributions
- costs of materials and consumables used in R&D
- utilities like power and water which are used in R&D processes
- software costs directly related to R&D activities
- payments to subcontractors and external agencies, provided they relate to R&D (Note: For the accounting period starting 1 April 2024, the subcontractor needs to be based in the UK).
4. Work in ‘projects’
HMRC typically prefers claims to be split into projects, so keeping detailed records for each project throughout the year will help ensure a comprehensive claim.
5. Review past claims
R&D tax credits can be claimed for previous years, typically up to two years from the end of the accounting period in which the R&D expenditure occurred.
6. Work with a specialist adviser
Significant changes have recently been made to the schemes, making claims even more complex. Working with a specialist can significantly increase the likelihood of a successful claim.
The impact of R&D tax credits on business innovation
R&D tax credits are more than just a tax relief; they’re a catalyst for innovation. For many companies, the financial relief these credits provide makes the difference between pursuing and shelving a new idea due to cost concerns.
Supporting SMEs and large businesses alike
While large companies often have the resources to dedicate entire teams to R&D, SMEs may find allocating funds to innovative projects more challenging. R&D tax credits level the playing field by making it more feasible for smaller companies to invest in research and development.
Don’t miss out on R&D tax credits
R&D tax credits are an invaluable resource for UK businesses. To ensure you’re making the most of this opportunity consider seeking advice from a specialist.
Get in touch with us today to learn more about how we can help your business innovate and grow.