Updated 31 May 2023
R&D tax credits could reduce your company’s tax bill or provide a cash sum if you haven’t yet made a taxable profit.
Since the Government introduced the concept of tax credits for expenditure on Research and Development in April 2000, there has been a steady stream of improvements to the regime.
Many companies who could qualify are missing out on these valuable incentives. Could your company be one of them? It’s never too late to appraise your circumstances: there are generous levels of rebates available.
In this guide, we’ll tell you what you need to know about the basic rules for R&D tax credits.
What are the tax reliefs available?
If your company is a small or medium sized enterprise (SME) that satisfies the qualifying conditions below, you can make a claim to uplift its qualifying expenditure on R&D by 86% for tax purposes. This means that for every £100 of qualifying expenditure, your company can claim £186 as a deduction against its taxable income.
Loss-making companies can also claim a repayment of tax equivalent to approximately 18.6% of their qualifying costs, as defined below. This can result in a significant cashflow benefit, particularly in the start-up phase or early years of the business.
For accounting periods beginning after 1 April 2021, the above credit is capped at broadly three times the claimant company’s total PAYE and NIC costs for the year plus £20,000 (subject to certain exceptions). Further proposals are expected to restrict claims in respect of R&D undertaken in the UK only from April 2023.
The above reliefs apply only to expenditure which is revenue in nature and not externally subsidised. Capital costs (for example, those relating to the purchase of equipment used in the R&D process) may instead qualify for enhanced 100% capital allowances.
What does ‘Research and Development’ cover?
The R&D of the company must entail an appreciable element of novelty that results in:
- a scientific or technological advance, or
- clarification of an area of scientific or technological uncertainty
For example, in a software project, you may need to demonstrate that software relies on newly developed algorithms or architectures which break new ground in the industry sector as a whole.
R&D can also include the design of products, services and software involving new technology or substantially improving existing products and services. This definition also includes the construction of prototypes, provided that these were not intended for resale.
HMRC do not, however, normally consider gradual improvements of an existing product or service to be R&D.
When making a claim, your company must be able to demonstrate to HMRC that the product or service is:
- innovative
- cutting edge
- a technological advance on what is currently available in the market
To give companies more certainty as to whether their R&D is qualifying for these purposes, an Advance Assurance scheme is available when your company makes its first claim.
What is a ‘small or medium sized enterprise’?
For these purposes, an SME is a company which
- has less than 500 employees; and
- has an annual turnover not exceeding €100 million; or
- has gross assets on its balance sheet not exceeding €86 million
If your company is part of a group, the group must satisfy these limits. Special rules can also apply where a party has at least a 25% interest in another company or vice versa.
What expenditure qualifies for R&D tax relief?
- Gross employee costs, including 65% of subcontracted R&D expenditure and agency staff plus the cost of items used up in the development process. Benefits in kind are generally excluded
- The cost of software and power, such as gas and electricity directly used in the R&D process
- Staff and subcontracted costs related to so-called indirect qualifying activities such as security, training and equipment maintenance
What about large companies?
Large companies have a different scheme: they are entitled to claim a 20% tax credit on their qualifying R&D expenditure on their qualifying R&D expenditure. This refund is itself taxable (and recognised within other operating income in the statutory accounts). This change significantly narrows the benefits of the SME regime.
How do I claim?
The claims process only requires the preparation of a brief synopsis of your R&D project, supported by a simple spreadsheet detailing the qualifying costs.
The Advance Assurance process means that companies can have certainty that their R&D projects qualify for these valuable reliefs.
How we can help
BKL’s tax specialists have generated significant tax refunds and savings for clients investing in R&D. The projects have ranged from fingerprint recognition systems to robotic machinery for the flat-glass industry. Many of the clients we’ve assisted have undertaken groundbreaking software work.
There are pitfalls in the legislation and there are time limits for making claims. But by addressing these issues early, we have succeeded in obtaining HMRC’s agreement to the vast majority of claims submitted – without adjustment, and extremely cost-effectively.
To learn more about how the relief may apply to your business or for assistance with making a claim, please get in touch using our enquiry form.