R&D tax credits explained

Image of Research & Development Costs

July 21, 2021

The R&D tax credit scheme was launched in the UK to encourage innovation. It was used to incentivise businesses to invest in scientific and technological R&D.

The reward? A substantial corporation tax deduction or cash payment from HMRC, depending on set criteria being met. The idea is to use this cash injection or tax relief to reinvest into further R&D and to grow your company and industry. The more that is invested in R&D, the higher the tax credit, and the cycle continues.

The end goal is greater wealth creation in the UK economy. Which is a win-win for the government, the business, and everyone in between.

Exactly how do R&D tax credits work?

In a nutshell, companies that are producing new products or are improving any aspect of the business and its operations are eligible for an R&D tax credit. Before you get too excited, HMRC does have stringent criteria as to what projects qualify for R&D Relief:

Your client’s company will need evidence that their project;

  • looked for advancement in science and technology
  • had to overcome uncertainty and tried to overcome this uncertainty
  • could not be easily worked out by a professional in the field
  • conducted the R&D in a systematic and thorough fashion

The above can apply to developing a new product, service or process, or enhance an existing one. And the beauty is that it’s available to all sectors. One caveat though, the product or advancements made must benefit the relevant industry as a whole, and not only your client’s business.

The element of risk is an important one to consider too. Did your client know what the outcome was going to be? Is there an element of uncertainty or risk associated with the project? And has your client attempted to overcome that risk? And most importantly, do they have the necessary evidence? Your claim will be kicked out if you lack the supporting documentation to prove the expenses associated with the relevant R&D.

Is your client’s company eligible for the R&D tax credit?

If your client is eligible, they can reclaim up to 33% of their R&D costs! And if it’s their first claim, you can claim for the last two accounting periods.

The actual benefit they could receive depends on the size of the company and whether it is profitable or not.

SME’s can claim research and development tax credit if the company has:

  • less than 500 staff
  • a turnover of under €100m or a balance sheet total under €86m

However, if their company has received any grants or subsidies for the particular project that is being claimed, then they might not qualify.

Larger companies, and SME’s whose projects have received funding, could qualify for the less lucrative but still highly beneficial RDEC regime. Profit and loss-making projects benefit, in that if the company made a profit, the RDEC benefit reduces the corporation tax liability, and for loss-making companies, they receive a credit that can either be transferred to a cash pay-out or used instead of previous tax liabilities.

Your client’s company could claim via both schemes if applicable. For example, if they are an SME but one of the eligible projects has received a grant. Using both will maximise your client’s benefits.

Still not sure if your client qualifies?

Ask yourself the following questions:

  1. Has your client launched a new product or project recently which could advance the fields of science and technology? Or are they planning on launching one? (The benefit applies even if the product/project fails.)
  2. Many companies have had to innovate or change direction to stay relevant, thanks to the current pandemic. Is your client one of them? This may include anything from new online tools to manage your business more effectively, to advances in telecommunications, to new product development.
  3. Does your client develop patents, prototypes, or software? Again, these are all indications that your client could be eligible for the R&D tax credit.
  4. Does your client employ engineers or scientists? Designing advancements on current systems, plotting new infrastructure, and experimentation are all R&D-qualifying criteria.
  5. Does your client work within the following industries? Agriculture, Manufacturing, Oil and Gas, Engineering, Architecture, Construction, Software, Food and Beverage.

Below are some ‘real-world’ examples of potential R&D tax credit claims.

Your client:

  • Is in the food and beverages industry and they are developing a new plant-based product
  • Enhancing a current ventilation system to be more energy-efficient for the air-conditioning industry
  • Is enhancing their IT security systems
  • Has developed a new communication model or method of content delivery
  • Is a beer-brewer in the process of developing a new type of beer

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