R&D tax credits explained

Many businesses in the UK are still missing out on claiming R&D tax credits when they carry out innovative research and development work. This is usually due either to a lack of awareness that they are available or an assumption that the project being undertaken won’t be eligible. Before you can make a claim, of course, you need to have R&D tax credits explained. So, here’s our brief guide with everything you need to know.

What are R&D tax credits?

Research and development (R&D) tax credits are awarded to businesses that engage in innovative projects that seek to make advancements in science and technology. They were brought in by the government in April 2000 and offer significant remuneration to companies seeking to overcome scientific and technological uncertainties. They are usually awarded either as cash or as a reduction on the company’s Corporation Tax bill.

Who is eligible?

Any limited company that undertakes a project seeking to resolve a scientific or technological uncertainty could be eligible for the tax relief. As long as the work is likely to benefit the industry or sector as a whole, there’s a good chance it qualifies. Businesses from a range of sectors – from architecture and engineering to food manufacture and aviation – can qualify.

What can I claim for?

A set of qualifying costs is outlined by the government. These include staffing costs such as salaries, pension contributions and NI contributions, a percentage of subcontracting costs, consumables and certain software costs.

What schemes are there?

There are two schemes available: the SME scheme, which is for companies with fewer than 500 employees and an annual turnover of under €100m; and the RDEC scheme, for companies whose figures exceed the above.

Can I claim if I’ve received a grant?

The receipt of a grant affects your claim for R&D tax credits. If the grant is classified as a Notified State Aid grant, this project can only claim relief under the RDEC scheme. If, however, the grant is non-Notified State Aid, you may be able to claim partially under RDEC and partially under the SME scheme, depending on the funding terms. The area is notably complex, so speak to your tax accountant for complete clarity.

How much will I receive?

The rate of relief depends on several factors, such as the size of your company and whether you are profitable or loss-making. Profitable SMEs can receive up to 25% of eligible expenditure in remuneration, while loss-making SMEs can recover as much as 33.35% of their qualifying costs. The RDEC scheme is less generous, with up to 12% of costs remunerated.

How can I make a claim?

A claim for R&D tax credits is filed along with your Corporation Tax return. In order to make a claim, you’ll need to calculate the costs of the project and multiply the expenditure by the applicable enhancement rate. It’s best to seek help from your tax advisor when making the calculations to ensure your claim is accurate. You’ll also need to provide supporting documents to evidence the challenges faced and how they were overcome, as well as a full cost breakdown.