What are R&D tax credits?
Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and ultimately growing.
How do R&D tax credits work?
Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
To benefit from R&D tax incentives, you must:
R&D can take place in any sector. It occurs in everything from classic car restoration to engineering, and construction to software development.
The government’s R&D criteria are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:
If you’re not sure if your project is possible, or you don’t know how to achieve it in practice, you could be resolving technological uncertainties and be carrying out qualifying R&D.
What incentive you use to make an R&D tax credit claim will largely depend on whether you are an SME or a large company.
SME:
Fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.
Large company:
500 staff or more and either more than €100 million turnover or €86 million gross assets.
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax incentive. And if you are a large company, via the Research and Development Expenditure Credit (RDEC).
However, there are a few factors such as grants and subcontracting that can restrict an SME from accessing the SME incentive. This means you may need to make a claim via RDEC – or via both incentives.
We help SMEs across all sectors receive millions of pounds every month to re-invest back into their businesses. It is possible to make use of R&D tax credits and grant funding together by using both incentives to ensure maximum value.
R&D tax credits are calculated based on your R&D spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate (see below). This produces your ‘enhanced expenditure’.
When you deduct your enhanced expenditure from your taxable profits, or add it to your loss, it will result in:
SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. The average claim made by SMEs in the UK is £57,228 (2018-19).
Large companies are able to claim up to 11p for every £1 spent on qualifying R&D activities. The average large company (RDEC) claim in the UK is £632,931 (2018-19).