May 7th 2020 / BY: Wisteria

R&D Tax Credits Explained

Britain has long been recognised as a world-leader in science and technology, and some of the biggest breakthroughs of the past 50 years have their roots here in the UK. Major advances, such as the jet engine, DNA profiling and the World Wide Web have put Britain at the forefront of global innovation. To nurture this spirit of invention and aid UK businesses in their pursuit of progress, the government introduced R&D tax credits. And if your company is investing in innovation, you may be entitled to a claim.

What Are R&D Tax Credits?

Research and Development (R&D) tax credits are a government incentive, designed to encourage businesses to invest in innovation. By rewarding companies for exploring new advances in science and technology, the initiative aims to drive progress and change, and boost the country’s economy. R&D tax credits are an invaluable source of revenue for companies that are looking to expand their research and development processes. They can be used to mitigate certain costs, provide a welcome injection of cash and help businesses grow. Here are some of the costs for which you can claim R&D tax credits:

  •  Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses
  • Payments to subcontractors and freelancers
  • Materials and consumables including heat, light and power
  • Certain types of software
  • Payments to the subjects of clinical trials

Is My Company Eligible for R&D Tax Credits?

R&D tax credits are available to any UK business, no matter the size, sector or industry. Last year alone, nearly 40,000 companies took advantage of the scheme, claiming approximately £3.5bn in tax relief. If your business is involved in innovating, improving or developing a process, product or service, you may be entitled to R&D tax credits. In order to benefit from this tax incentive, you must be a limited UK company that is subject to Corporation Tax. In addition, you must be able to demonstrate that:

  • Your company is actively seeking a breakthrough in science and technology
  • You have invested money in research and development
  • Your project breaks new ground and goes beyond the simple application of existing technologies
  • You have had to overcome uncertainty in order for the project to succeed
  • The breakthrough you were working on could not be easily resolved by a professional in your chosen field
  • The project relates to your company’s trade — whether that’s an existing business or one you intend to set up based on the results of the R&D

How Can I Claim R&D Tax Credits?

The way you claim R&D tax relief depends largely on the size of your organisation, with different schemes available for small and medium-sized enterprises (SMEs) and large companies.

You can claim SME R&D relief if your company:

  • Employs fewer than 500 staff
  • Has an annual turnover of under 100 million euros or a balance sheet total under 86 million euros

SME R&D relief allows you to:

  • Deduct an extra 130% of your qualifying costs from your annual profit, along with the usual 100% deduction, making a 230% deduction in total
  • Claim a tax credit if your company is loss making, worth up to 14.5% of the surrenderable loss

Large companies can claim R&D tax relief via Research and Development Expenditure Credit (RDEC), which replaces the relief previously available through the large company scheme. As of April this year, large companies can claim 13% of their qualifying R&D expenditure through RDEC.

Speak to the Experts

R&D tax credits can transform your business, helping you cut costs, increase productivity and improve your bottom line. But to get the most out of the initiative and ensure you’re not leaving any money on the table it pays to speak to a professional. Whether you’re a new start-up or an established company, our experienced tax specialists can help. We’ll guide you through the process step by step, help you cut through the red tape and get you the best deal possible.