R&D Tax Credits

Research and development is the term used to describe a business’ attempts to improve their competence and knowledge in their field in order to increase revenue streams via the creation of new products or processes, or the improvement of existing ones.

While research and development is an important part of any innovative company, it can be a costly process – and this can be problematic if your SME has a limited turnover. R&D tax credits are a government-funded scheme aimed at helping UK companies that wish to enhance their business’ efficiency and can be claimed either as cash payments or through a reduction in the amount of corporation tax you pay.

Your company could be eligible to receive R&D tax credits if you can show that the business “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”, as per the official government R&D tax relief website. You must also be able to prove that you have spent money on projects designed to achieve these goals.

Your business must meet certain additional criteria in order to apply to receive R&D tax credits; for example, it must be a registered limited company and subject to corporation tax in the UK.

To apply for R&D tax credits, you need to fill in a company tax return form and provide details of your expenditure. To work out your expenditure, you will need to do the following calculations as per the government’s official guidelines:

• Work out the costs that were directly attributable to R&D.
• Reduce any subcontractor or external staff provider payments to 65% of the original cost.
• Add all costs together.
• Multiply the figure by 130% to get the additional deduction to put into your tax calculations.
• Add this to the original R&D expenditure figure, which you can enter into your tax return.

You will need to provide evidence to support your claim, with a written explanation of how your expenditure:

• Looked for an advance in science or technology and aimed to achieve this advance
• Had to overcome scientific or technological uncertainty
• Overcame this uncertainty
• Could not easily be worked out by a professional in the field

Your application must also include: the start and end dates of the accounting period of your research and development work (note: you can only claim tax relief for up to two years beyond the end date of this accounting period); your unique tax reference number; the total amount of tax relief you wish to claim; a summary of your costs; your unrelieved trading loss for the claim period.

The amount of tax relief you can claim depends on which scheme you are eligible to apply for. Companies with fewer than 500 employees and an annual turnover of less than €100m or a balance sheet of over €86m are eligible for the SME R&D tax credit scheme, which allows you to claim up to 33% of your R&D expenditure against your corporation tax.

The exact figure you are entitled to depends on additional factors, for example whether your business is profitable, loss making or breaking even and how much corporation tax you pay. If your business is profitable, you could claim up to 25% of your R&D expenditure, while if you are breaking even or making a loss that figure is likely to be 15-33%.

You are entitled to claim for a number of expenses that fall under research and development, including:

• Staff costs (both internal and external) - salaries, NI contributions, pension contributions and R&D-related expenses
• Consumables – materials and resources that are used during research and development
• R&D sub-contractors – research and development outsourced to external organisations
• Software used for R&D – computer programs used specifically for the purposes of research and development

A more detailed explanation of what expenses can and cannot be claimed for can be found in this official government guide.

If your company has received a grant or subsidy you may still be entitled to R&D tax relief, but you will need to claim via the Research and Development Expenditure (RDEC) scheme.

As with the SME R&D tax credit scheme, this can be claimed against your corporation tax liability or paid as cash. However, your entitlement is likely to be significantly lower, around 12% of your research and development expenditure.

You can usually expect to receive your R&D tax credit repayment within 28 days of submitting your claim.