R&D tax credits

What is the minimum expenditure for an R&D tax credit claim?

A. There is no minimum expenditure on qualifying R&D required in order to make a claim for a tax credit. This wasn't previously the case; until 1st April 2012 it was necessary to spend at least £10,000 on qualified research and development projects to be eligible for a claim. This is now no longer the case, so regardless of your R&D expenditure, you can make a claim for R&D tax credits. However, for the purposes of assessing true R&D activity in the context of government R&D tax credit claims, spend of over £3000 tends to be viewed as qualifying spend. Smaller amounts are likely to suggest that the project wasn't necessarily true R&D because of the sizeable nature of such projects and the costs involved in hiring the experts needed to develop new solutions to existing problems, as well as software and materials, for example.

How do I know if my business is eligible for R&D tax credits?

In order to be eligible to make an R&D tax credit claim, you must fulfil the following criteria:

  • You must be a UK company that pays Corporation Tax.
  • You must be classed as a going concern, and not be in liquidation or administration.
  • You must have carried out qualifying R&D activities, and spent money on these activities.

This list is not comprehensive, however. Other subcontracting and grants criteria must also be considered as part of your claim. It is therefore recommended that you seek professional advice regarding whether or not your business is eligible for R&D tax credits.

Can sole traders apply for R&D tax credits?

No, research and development tax credits are designed for companies with corporation tax liabilities in the UK. As sole traders pay no Corporation Tax, they are ineligible for the scheme. 

Can SMEs claim for R&D tax credits?

Yes, SMEs can claim research & development (R&D) tax credits, provided that the following conditions are met:

  • They are subject to UK Corporation Tax
  • The company is a going concern and not going into administration
  • The SME’s balance sheet meets monetary thresholds
  • The SME delivers a trade which relates to R&D activities that it seeks to claim for
  • No other subsidies or grants have been granted in respect of R&D spending

    It is always encouraged to seek legal advice if you are unsure whether or not your business is eligible for R&D tax credits. Our team can help you to assess your eligibility for R&D tax credits and grants, along with other types of public funding that is available to UK businesses for R&D development activity.

Can an LLP apply for R&D tax credits?

In most circumstances, Research and Development (R&D) tax credits are only on offer to companies subject to UK Corporation Tax. As Limited Liability Partnerships (LLPs) do not pay this tax, they typically cannot claim under the R&D tax credits scheme. This is because R&D tax credits apply a tax relief figure to Corporation Tax. However, there may be some special circumstances in which an LLP can access Research & Development tax incentives and grants. To find out if your LLP could qualify for R&D tax credits, it is recommended that you seek professional advice.

Is it possible to switch my R&D tax credit status between SME and RDEC?

Yes, a company's R&D tax credit status can change as the business's turnover, headcount and gross assets change. These are the factors that determine your categorisation between the large company research & development expenditure credit scheme (RDEC) and the SME R&D scheme. The latter tends to be more generous, and most companies prefer to be categorised within the SME R&D tax credits scheme where possible.

To qualify, you must have a staff turnover of 100 million Euros or less or gross assets of 86 million Euros or less. If you exceed these figures, you fall into the large company category for R&D taxation, even if you have fewer than 500 staff. If your company's status changes, the qualifying criteria must be in place for two consecutive years in order to allow a switch in R&D taxation categories, unless an SME is bought out by a bigger company in an acquisition scenario. This is a complex area, and the team at F.Initiatives can provide advice and support on your specific situation.

If I switch between the RDEC and SME scheme, what are the effects on the benefits I receive?

The rate of the R&D tax credit is different between the RDEC scheme and the SME R&D tax credit scheme. If companies move to the former from the latter, its R&D tax credits will drop to 10 percent per £1 of spending under the RDEC scheme, compared to 33 percent per £1 of spending under the SME scheme. This is a simplification by way of example as other criteria must be taken into account in this highly specialised area.

Why is expenditure a key qualifier of R&D for R&D tax credit purposes?

Although technological innovation is a primary qualifier for R&D, in order to submit a credit claim you must have spent money developing the new solution and in a way that HMRC can include it for the calculation of a tax credit. The rules here are relatively clear cut though, and your expenditure will usually be admissible if your business is in the UK and has spent money to develop R&D, either on staff or contractors / subcontractors, materials and software licences. The money must have been spent within the past 36 months.

How do I know that my project is eligible for R&D tax credit claims?

A. We would always recommend getting in touch with our team of experts at F.Initiatives if you have questions about this. We can review your project and advise on its eligibility for R&D tax credit claims and UK R&D grants. However, here are some useful general guidelines that can help you to make a self-assessment:

1. Technical uncertainty
- if the project had an evident or obvious outcome, it is unlikely to be classed as R&D.

2. Innovation - if the project delivered an outcome classed as common knowledge, then it would fail the innovation test for R&D

3. Cost - if you have only spent up to £3k on the project, it typically will not qualify for R&D tax credits, while a budget in excess of that amount typically will.

4. Qualifications - if you have been employing competent, highly-qualified and expert people to work on your project, then this could indicate eligibility for R&D. If the staff working on the project are not specialists or experienced practitioners in the field, then, it may not count as R&D for tax credit purposes. It is best to discuss this with a certified R&D tax expert who can assess your individual business case.

As a rule of thumb, if you have employed professional engineers, developers or other specialists to develop an innovative or new solution to an existing problem and spent over £100k on the project in the process, then it will be more certain that the criteria above are fulfilled.

Contact our team for advice and assistance on this complex issue and we will be happy to help you.

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