How can businesses claim R&D tax credit?
Research and development (R&D) tax credits are a valuable government incentive designed to encourage innovation and investment in the UK. By claiming R&D tax relief, businesses can offset the costs of their research and development activities, ultimately boosting their cash flow and profitability.
However, many companies, small and medium-sized enterprises (SMEs), are unaware of the R&D tax credit schemes or unsure of how to claim them. This blog post aims to provide a comprehensive guide on how businesses can effectively claim R&D tax relief, covering the eligibility criteria, qualifying activities, and the claim process.
Whether you're a software company developing new technologies or a manufacturer enhancing your production processes, this guide will help you understand the benefits of R&D tax credits and the steps to take to maximise your claim. By taking advantage of this government incentive, you can reinvest the savings into further innovation and drive your business forward.
What are R&D tax credits?
R&D tax credits are a valuable government incentive designed to encourage and reward businesses for investing in innovation. They allow companies to claim a tax deduction or cash payment for the money they spend on research and development (R&D) activities.
The R&D tax credit schemes are available to both small and medium-sized enterprises (SMEs) as well as larger businesses. The key is that the company must be registered in the UK and liable for corporation tax.
The government's definition of qualifying R&D is broad, covering a wide range of industries. It includes activities aimed at developing new products, processes or services, as well as enhancing existing ones. Essentially, if a company is working to advance knowledge or capability in science and technology, they may be eligible for R&D tax credits.
By claiming these credits, businesses can reduce their tax liability or receive a cash payment, which they can then reinvest into further innovation and growth.
Who is eligible for R&D tax credits?
The UK government's R&D tax credit schemes are designed to support innovation and technological advancement across a wide range of industries. These incentives are available to both small and medium-sized enterprises (SMEs) as well as larger businesses, provided they meet certain eligibility criteria.
Small and medium-sized enterprises (SMEs)
The SME R&D tax credit scheme is the most well-known and widely utilised of the two main R&D tax credit programs in the UK. It is specifically tailored to support smaller, more agile companies that are actively investing in research and development.
To qualify for the SME R&D tax credit scheme, a company must meet the following requirements:
- Be a UK-registered company: The business must be incorporated in the UK and liable for paying corporation tax. This includes limited companies, partnerships, and some self-employed individuals.
- Have fewer than 500 employees: The company must have a headcount of less than 500 full-time equivalent (FTE) employees. This helps to target the incentive towards smaller, more entrepreneurial businesses.
- Meet the SME financial thresholds: The company's annual turnover must not exceed €100 million, and its balance sheet total must not exceed €86 million. These financial limits ensure the tax credits are directed towards genuinely small and medium-sized enterprises.
- Carry out qualifying R&D activities: The company must have incurred expenditures on research and development projects that are aimed at advancing knowledge or capabilities in science and technology. This can cover a wide range of activities, from developing new products and services to enhancing existing ones.
By meeting these criteria, SMEs can claim a tax deduction worth up to 230% of their qualifying R&D costs. This means that for every £100 spent on eligible R&D, the company can reduce its tax bill by £230. Alternatively, if the company is loss-making, it can claim a cash credit worth up to 14.5% of the surrenderable loss.
Larger businessesWhile the SME R&D tax credit scheme is the more well-known program, the UK government also offers an R&D tax credit scheme for larger companies. This is known as the Research and Development Expenditure Credit (RDEC) scheme.
The RDEC scheme is available to companies that do not qualify for the SME program, either because they have more than 500 employees or exceed the financial thresholds. To be eligible, a company must:
- Be a UK-registered company: As with the SME scheme, the business must be incorporated in the UK and liable for paying corporation tax.
- Carry out qualifying R&D activities: The company must have incurred expenditures on research and development projects that are aimed at advancing knowledge or capabilities in science and technology.
Under the RDEC scheme, companies can claim a tax credit worth 13% of their qualifying R&D expenditures. This credit can be used to either reduce the company's corporation tax liability or, if the company is loss-making, be paid out as a cash credit.
Qualifying R&D activities
Regardless of whether a company qualifies for the SME or RDEC R&D tax credit scheme, the key requirement is that the business has undertaken qualifying R&D activities. This means the company must have spent money on projects that are seeking to achieve an advance in science or technology.
The definition of qualifying R&D is broad and can cover a wide range of industries, from software development and engineering to manufacturing and life sciences. Activities that may qualify include:
- Developing new products, processes, or services
- Enhancing existing products, processes, or services
- Resolving scientific or technological uncertainties
- Adapting or modifying existing technology for new applications
By understanding the eligibility criteria and the types of R&D activities that qualify, businesses of all sizes can take advantage of the significant tax savings and cash flow benefits offered by the UK's R&D tax credit schemes.
What qualifies as R&D?
The UK government has a broad definition of what constitutes qualifying research and development (R&D) activities to claim tax credits. This means that a wide range of innovative projects and initiatives undertaken by businesses can potentially be eligible for this valuable tax incentive.
Developing new products, processes or services
One of the key criteria for qualifying R&D is the development of new products, processes or services. This could involve creating something entirely novel, such as an innovative piece of technology, a groundbreaking manufacturing technique, or a unique service offering.
For example, a software company developing a new AI-powered analytics platform from scratch would likely be carrying out qualifying R&D activities. Similarly, a manufacturer experimenting with new materials and production methods to create a more energy-efficient product would also meet the criteria.
Increasing existing products, processes, or services
R&D tax credits are not just limited to complete innovations. Businesses can also claim for projects that seek to enhance or improve upon their existing products, processes or services.
This could include upgrading an existing product with additional features or functionality, refining a manufacturing process to increase efficiency and quality, or developing a new service module to complement an existing offering. As long as the project is aimed at making advancements in science or technology, it can qualify for R&D tax relief.
For instance, a food manufacturer looking to reformulate one of its products to reduce sugar content and make it healthier would be undertaking qualifying R&D. Likewise, an engineering firm modifying its CAD software to incorporate more advanced simulation capabilities would also be eligible.
Resolving scientific or technological uncertainties
A key aspect of qualifying R&D is the presence of scientific or technological uncertainties that the project is seeking to address or overcome. This means that the outcome of the R&D activities cannot be readily deduced by a competent professional in the field.
Projects that involve experimenting, testing, and investigating to find solutions to technical problems or challenges can therefore qualify for R&D tax credits. This could include anything from developing new algorithms to solve a complex computational problem to trialing different materials and production techniques to improve product performance.
For example, a pharmaceutical company conducting clinical trials to test the efficacy of a new drug compound would be carrying out qualifying R&D, as would a renewable energy startup exploring novel ways to store electricity generated from wind or solar power.
Broad applicability across industries
The government's broad definition of qualifying R&D means that businesses across a wide range of industries can potentially benefit from this tax incentive. From software and technology to manufacturing and engineering, any company investing in innovative projects aimed at advancing scientific or technological knowledge can claim R&D tax credits.
By understanding the scope of qualifying R&D activities, businesses can maximise tax savings and reinvest the funds into further innovation and growth.
How to claim R&D tax credits
Claiming R&D tax credits can be a valuable way for businesses to offset the costs of their research and development activities. However, the process of submitting a claim can seem daunting, especially for those who are new to the process. In this section, we'll break down the key steps to help you understand how to effectively claim R&D tax credits.
Identify qualifying R&D activities
The first step in claiming R&D tax credits is to identify the specific R&D activities that your business has undertaken. According to the government's definition, qualifying R&D activities are those that are aimed at advancing knowledge or capability in science and technology.
This can include a wide range of projects, such as:
- Developing new products, processes, or services
- Enhancing existing products, processes, or services
- Resolving scientific or technological uncertainties
It's important to carefully document the R&D activities, as this information will be a crucial part of your claim.
Determine eligible expenditures
Once you've identified the qualifying R&D activities, the next step is to determine the eligible expenditures that can be included in your claim. Eligible expenditures can include:
- Staff costs for employees directly involved in the R&D project
- Subcontractor or freelancer costs for work related to the R&D project
- Materials and consumables used in the R&D project
- Utilities and overhead costs directly attributable to the R&D project
It's important to keep detailed records of all the costs associated with your R&D activities, as this documentation will be required to support your claim.
Prepare the Claim
Once you've identified the qualifying R&D activities and eligible expenditures, it's time to prepare the claim. The claim should include:
- A detailed description of the R&D activities carried out: This should include a clear explanation of the scientific or technological uncertainties that the R&D project aimed to address, and how the project advanced knowledge or capability in these areas.
- The costs incurred on qualifying R&D expenditures: This should include a breakdown of the eligible expenditures, such as staff costs, subcontractor fees, and materials.
- An explanation of how the R&D project aimed to advance knowledge or capability: This should demonstrate how the R&D activities were focused on resolving scientific or technological uncertainties, rather than routine or incremental improvements.
It's important to ensure that your claim is well-documented and supported by evidence, as HMRC may request additional information or clarification during the review process.
Submit the claim
Once you've prepared the claim, you can submit it to HMRC either directly or through an accountant or tax advisor. If you choose to submit the claim directly, you'll need to follow HMRC's guidelines and ensure that you provide all the required information.
If you decide to work with an accountant or tax advisor, they can help you navigate the process and ensure that your claim is submitted correctly. They may also be able to provide additional guidance on maximizing your R&D tax credit claim.
Respond to HMRC inquiries
After submitting your claim, HMRC may request additional information or clarification. It's important to respond to these inquiries promptly and provide the requested information. Failure to do so could result in your claim being delayed or even rejected.
If HMRC has any concerns about the validity of your claim, they may conduct a more detailed review or audit. In these cases, it's important to cooperate fully and provide any additional documentation or information that HMRC requires.
Receive the tax credit
Once your claim has been approved, you'll receive the R&D tax credit either as a reduction in your corporation tax liability or as a cash payment. The amount of the credit will depend on the size of your business and the eligible expenditures that you've claimed.
By following these steps, you can ensure that your business can take full advantage of the R&D tax credit scheme and offset the costs of your innovation and development activities.
Benefits of claiming R&D tax credits
Claiming R&D tax credits can provide a range of valuable benefits for businesses of all sizes. Here are five key advantages to consider:
- Reduce Your Tax Liability
The primary benefit of R&D tax credits is the ability to reduce your company's tax bill. Businesses can claim a deduction from their taxable income or receive a cash payment from HMRC for their qualifying R&D expenditures. This can result in significant savings, freeing up funds to reinvest in the company.
- Improve cash flow
R&D tax credits can also have a positive impact on your business's cash flow. By reducing your tax liability or receiving a cash payment, you'll have more working capital available to fund ongoing operations, invest in new projects, or expand your team. This improved cash flow can be especially beneficial for small and medium-sized enterprises.
- Drive innovation and growth
Claiming R&D tax credits can provide the financial resources to support your company's continued innovation and growth. By reinvesting the savings back into your R&D activities, you can develop new products, enhance existing offerings, and stay ahead of the competition. This can lead to increased market share, revenue, and profitability over the long term.
- Demonstrate commitment to innovation
Claiming R&D tax credits can also help your business demonstrate its commitment to innovation and technological advancement. This can be a valuable selling point when pitching to potential clients, investors, or partners. It shows that your company is actively investing in research and development to stay at the forefront of your industry.
- Access additional funding opportunities
Finally, claiming R&D tax credits can open the door to additional funding opportunities. Some lenders and investors may view a company's ability to claim these credits as a positive indicator of its innovative capabilities and growth potential. This can make it easier to secure financing for future projects or expansion plans.
By taking advantage of the R&D tax credit scheme, businesses can unlock a range of financial and strategic benefits that can drive their long-term success. Whether you're a small startup or a large enterprise, exploring this government incentive can be a smart move for your company.
If you're looking for a tax advisor or specialist who can help your business claim R&D tax credits, consider the expertise of dns tax. As a leading provider of tax advisory services in the UK, DNS Tax has a deep understanding of the R&D tax credit scheme and can guide you through the entire process.
Their team of experienced tax professionals can help you identify qualifying R&D activities, calculate the eligible expenditures, and prepare a comprehensive claim for submission to HMRC. With their support, you can maximize your R&D tax relief and reinvest the savings back into your business to drive continued innovation and growth.
Choose dns tax as your trusted partner for R&D tax credit claims. contact today at 0333 2422 572, email dnstax@dnsaccountants.co.uk, or book a free consultation. Our team of experts is ready to help you take your business to the next level.
Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning.
I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents.
I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.