Research and Development (R&D) Tax Credits

In every industry, there are new and improved processes, products and services waiting to be discovered. Your business could be the one to pioneer them by conducting research and development projects in uncertain fields. The only thing you have to lose is some money; but fortunately, there’s support available and you don’t have to face this financial risk alone.

If your business is investing in innovation, you could be eligible to receive rewards from the UK Government called research and development (R&D) tax credits. They’re a valuable source of money but, as with all financial aid, you shouldn’t sign up for anything until you know exactly what it entails. After reading our guide below, you’ll have a much better understanding of whether R&D credits are right for you.

What is R&D tax credit?

Simply put, R&D tax credits are a reward the UK Government uses to incentivise companies to invest in innovation. They’re a way of securing funding that you can use to fuel your pioneering efforts, conduct regular business operations or anything else that will help your business grow.

Many types of companies can claim research and development tax credits, across any size or sector. Additionally, you can claim it even if your project was unsuccessful. However, there are some rules regarding what counts as research and development to qualify for tax credits.

What counts as R&D?

To qualify for R&D tax credits, the work needs to be part of a project to make an advance in a field of science or technology related to your business’ trade. The field must be part of a hard science – a category that excludes social sciences and purely theoretical fields.

Most likely, your project will involve you either creating brand new processes, products or services, or improving existing ones. There are some additional criteria for the project that you must meet:

·       The project needs to have aimed to create an advance that will contribute to the entire field (not just your business).

·       You must demonstrate that the advance is significant and that professionals in the field couldn’t easily work it out.

·       There needs to have been uncertainty – this means that no one knew about the advance and the method of arriving at it beforehand.

·       You must show that research, testing and analysis were used to overcome that uncertainty.

The idea behind R&D tax credits is to encourage innovation in business. Often, in trying to accomplish something that hasn’t been done before, you can fall short. This is part of exploration and risk-taking, and the Government recognises this.

For this reason, research and development tax credits are available for failed projects. This means that there’s less risk involved in your pursuit of innovation, and you can get support to cover the costs of failure.

How does R&D tax credit work?

To claim R&D tax credits, you need to be a limited company in the UK that pays corporation tax and has spent money on projects that qualify as research and development activities.

There are two different schemes, each based on the size of your business, that you can use to make a claim. How much you receive in research and development tax credits depends on which one you use.

Types of R&D relief

There are two types of relief: small and medium-sized enterprises (SME) R&D relief and research and development expenditure credit (RDEC).

·       SME R&D relief: This is for companies with less than 500 members of staff and a turnover of under €100 million (£83.9M) or a balance sheet total of less than €86M (£72.1M).

·       RDEC: This scheme is for large companies that don’t qualify for SME R&D relief. It can also be used by businesses that have been subcontracted to carry out R&D by another large company.

Both schemes allow you to claim on costs involved in your project, including:

·       Employee costs – such as salaries, wages, and National Insurance and pension contributions

·       Subcontractor costs – in particular, work done by a charity, higher education institute, scientific research organisation, health service body, individuals or partnerships of individuals

·       Consumable items – including materials and utilities

SME R&D relief also lets you claim for software license fees and, if your project is in the pharmaceutical industry, payments made to clinical trials volunteers.

Neither scheme allows you to claim for:

·       Producing and distributing goods and services

·       Capital expenditure

·       Land costs

·       Patent and trademark costs

·       Rent or rates

Which R&D tax credit scheme is right for me?

If your business has less than 500 staff, as well as a turnover of less than €100M (£83.9M) or a balance sheet total of less than €86M (£72.1M), SME R&D relief might be suitable for you.

However, there are some additional factors below that might affect your SME status, so you must know what they are before applying. If you don’t qualify for SME R&D relief, you should apply for RDEC.

Connected companies

Any company that holds over 50% of the voting rights of your company, or vice versa, is classed as a connected company. The number of staff, annual turnover and balance sheets of any companies that are connected to your own must be included in your calculations.

Partner companies

Similarly, a company that holds over 25% of your company’s capital or voting rights, or vice versa, is classified as a partner company.

For each partner company that you have, you need to include a proportion of that company’s staff, annual turnover and balance sheet in your calculation. This should be equal to the proportion of voting rights and capital that links your companies together. This simply means that if another company owns 40% of your company’s voting rights or capital, you need to include 40% of their staff, turnover and balance sheet in your calculation.

Prior funding

You can’t claim SME R&D relief if your project has been subcontracted by another company, funded through notifiable state aid, or you have received any other grant or subsidy for your R&D project.

How to claim R&D tax credit

The process of claiming research and development tax credits has two main phases. First of all, you need to calculate your enhanced expenditure so you can enter it into the CT600 full Company Tax Return form.

The government is quite generous when it comes to how far back you can claim R&D tax credit. You have up to two years from the end of the accounting period to which it relates to submit an R&D claim with HMRC. When claiming for a project that took place over a period longer than a year, you need to submit a separate claim for each accounting period that the project covered.

After submitting your claim, you can support it by providing important details about the project and your company using the Government’s online service.

R&D tax credit rates

The way that HMRC calculates how much your business is eligible to receive in R&D tax credits is based on the amount you spend on your research and development project and the type of relief you’re applying for.

SME R&D relief rates depend on whether your business is profit or loss-making. Relief for profit-making businesses comes in the form of a 25% Corporation Tax reduction. On the other hand, loss-making businesses receive up to 33% in cash.

RDEC relief is paid as a taxable credit of 13% of your claimed research and development project costs. After tax, you receive around 11%. If there’s no tax payable, you receive this as a cash credit.

Is R&D tax relief right for me?

If you run a limited company in the UK that’s subject to Corporation Tax and have spent money on qualifying research and development projects, R&D tax credits could give you the help you need.

As with all financial processes relating to your business, it’s prudent to get advice from a specialist. That way, you can be sure that your claims are accurate and you don’t forget to claim for something that you’re entitled to receive money for.

If for any reason you decide that research and development tax relief isn’t right for you, don’t worry. There are many other options available, including various types of funding that can give you the resources you need to keep growing your business. At Nucleus, our team of experts use their wealth of experience to find the right type of commercial finance for you. Get in touch with a member of our team today.