A guide to How R&D tax credits work

Technical guidance - February 2018

Research and development, or R&D as it is known for short, is a crucial part of any business’s development.

But for some companies, it’s also a source of tax relief. Her Majesty’s Revenue and Customs (HMRC) offers a range of R&D tax credits, and no matter what industry your business operates in or how big your company is, it’s worth looking into whether or not you can benefit from the government’s SME R&D tax credit scheme.

In this post, we’ll take a look at what R&D tax credits are and how your business can go about applying for them.

What does my business need to do to claim R&D tax credits?

Generally speaking, under HMRC’s rules your business has to be engaged in working out the answer to some kind of “scientific or technological uncertainties” in order to claim R&D credit.

Of course, this isn’t a very specific category – so there are plenty of possible ways you can gain R&D relief.

If you produce a new product, for example, it’s possible that you will be able to claim for some of the research that went into it. The same goes for companies who create a new service or process – so if you’re not in the manufacturing business, you may still be able to claim R&D credit.

And remember, if your research and development efforts cover changes made to a product (or, again, a service or product) you developed previously, this can also be considered a candidate for your R&D allowance.

There are a couple of important caveats, too, both of which widen the pool of beneficiaries when it comes to the R and D tax credits rules.

Firstly, agencies or providers who carry out one or more of the required actions described above on behalf of their clients may still be able to claim R&D tax credits. In addition, it doesn’t matter if your attempts at research and development were successful: there’s still a chance you can claim a research and development credit even if it didn’t work out, so make sure to keep all your documents and evidence in order to make a claim.

What costs can I claim back?

As a business looking to maximise your R&D tax relief, it’s likely that you’ll be wondering what costs you can claim back when it comes to R&D.

The definition developed by HMRC means that there are several choices when it comes to claiming R&D tax relief. If you can demonstrate, for example, that your spend on payments for staff, subcontractors or other workers (including crucial employer costs such as pension contributions) went towards research and development costs then you’re in luck.

You’re also able to apply for R&D tax deductions on the basis of your spend on materials as well as your staff costs. For example, any spend you make on vital commodities (such as power costs, or any basic needs for your factory or workspace, or any heating costs incurred as a result of R&D) can be claimed as a cost, so it’s worth making the most of it.

For those companies with a more modern, technological twist, meanwhile, the rules governing R&D tax credit claims are also applicable to certain types of software.

What are the R&D tax credit rates?

For those SMEs (small to medium enterprises) which are eligible to make R&D tax credit claims, there are a lot of savings to be made. Even those making the average R&D tax credit claim are benefitting from this tax rule, so it’s worth looking into.

Provided you fit the definition of an SME for this purpose (under 500 staff members combined with a balance sheet of under €86m or a turnover of under €100m), it’s likely that you’ll be able to take another 130% of your qualifying costs from your total annual profit as part of the R&D tax service – in addition to the 100% deduction you’d normally be entitled to.

In the event that your company hasn’t made a profit, you may be able to surrender your losses to HMRC in exchange for an R&D tax credit (in other words, money). The R&D tax credit rates are generous, giving you cash at a rate of 14.5% of your surrenderable loss. This can therefore mean you receive up to 33.35% of your R&D spend back from HMRC as cash, which can be extremely valuable if you are in a tricky financial situation.

What’s the research and development expenditure credit (RDEC) scheme?

When it comes to claiming under the government’s SME R&D tax credit scheme, larger companies may find themselves pushed into the RDEC scheme – which is a tax credit for 11% of all of your qualifying research and development spend. It’s worth keeping in mind that this tax credit is going up to 12% soon, providing even more value for your business.

It’s not always apparent whether you’ll be a part of the SME scheme or the RDEC scheme when making R&D claims, and often you’ll need the services of an independent consultant at a firm like F. Initiatives to help you work out which category your business falls into before making R&D tax credit claims.

Factors that affect claims

There are a number of factors that can affect a claim, which are as follows. Whether or not you carried out the work as a subcontractor can be a factor, and many businesses wonder how this status will affect their claim. In the event that the R&D work carried out by your company was for a large business, it’s likely that you’ll get pushed into the RDEC scheme to get your research and development credit.

Other factors which can come into play here include where your business is based, whether or not your business earned most of its income in the UK or further afield, and whether or not your business got some help from a grant in order to tackle the R&D problem concerned.

No matter what your concerns are, the best course of action to take is to speak to one of our consultants who can help you work out whether or not you can claim.

R&D Tax Credits Advisors. R&D Tax Credits Experts.