The research and development tax credit isn’t a novel or unique idea: 29 out of the 35 OECD countries offer R&D credits.
R&D isn’t just good for the economy. Businesses find these tax credits are valuable to them not only in money saved but in attracting investors and improving value. Tax credits can also be passed onto new owners and enhance the value of your business if you decide to sell.
The UK also offers tax credits in this vein. HMRC’s tax credits directly benefit SMEs whose R&D activities lead them to losses. Rather than receive tax penalties for losses, HMRC offers significant write-offs for qualifying expenses.
Does your business invest in research and development, and can you benefit from these tax breaks to take your company further? Keep reading to learn more about the nature of R&D tax relief in the UK.
R&D Relief: What's Available?
There are different types of R&D relief depending on the size of your company and whether the project has been subcontracted to you or not.
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Small and medium-sized enterprises (SME) R&D relief
You can claim SME R&D relief if you’re an SME with:
- Less than 500 staff
- A turnover of under €100m or a balance sheet total under €86m
- You may need to include linked companies and partnerships when you work out if you’re an SME.
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SME R&D relief allows companies to:
Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total £230% deduction
Claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss
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Research and Development Expenditure Credit
This replaces the relief previously available under the large company scheme. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. It can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company. The RDEC is a tax credit for 11% of your qualifying R&D expenditure u to 31st December 2017 and 12% from 1st January 2018.
Do You Qualify for an R&D Tax Credit?
R&D credits are not limited to industry, revenue, or size. Instead, your business must pass four tests to prove its eligibility.
To receive R&D relief from the UK government, your company must show how your qualifying project:
- Desired to find an advance in the hard sciences or technologies
- Overcame uncertainties (however it is not a requirement)
- Attempted to overcome the uncertainty. It isn’t a requirement for the project to overcome the uncertainties. Often, if the uncertainties couldn’t be overcome, this is due to the techincal or scientific unknowns
- Worked out an uncertainty that was new and wasn’t available from an existing solution as is
- Projects worthy of these tax credits may create a new process or product or alternatively improve an existing version.
Keep in mind that your advance in science or technology requires specificity and can’t fall within theoretical fields (i.e. pure maths) or social sciences (i.e. economics).
Here’s how you might pass these four tests:
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A Desire to Find an Advance in the Field
Your advance must prevent a step forward for the entire field or industry – it can’t benefit your business alone.
Advances still count if they were previously developed but never released or announced to the public.
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Identify Uncertainty
Uncertainty means working with variables that complicate your project because they’re unknown or not yet feasible with the current technology.
The uncertainty must be total: a team of experts shouldn’t be able to re-fit an existing technology to a new problem. It requires a solution people don’t necessarily know about yet.
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Attempt to Overcome Uncertainty
Demonstrate the scientific processes used in the research and development processes to overcome the uncertainty.
If you want a tax credit, you must show your work and provide descriptions of both the successes and failures you encountered during your work.
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Show That You Need a New Solution
Prepare to show why professionals weren’t able to help you along by outlining previous failed attempts at finding a solution.
What Kind of Activities Qualify Me for a Tax Credit?
In most cases, companies who qualify for tax credits don’t need to change their current operations to receive them. If you actively engage in one of the following activities, you’re likely to qualify already.
Regularly qualifying practices include:
- Spending on consumables and materials used in the process
- Developing new patents
- Creating new products
- The bulk of these tax credits are claimed by the manufacturing industry across computer, chemical, appliance, and machinery manufacturing.
Other common industries include information, professional, technical, and scientific services, finance and insurance, and wholesale and retail trade.
How to Claim Your Tax Credits
Don’t neglect your R&D tax credits, they provide serious financial relief, especially if you’re currently making losses. For example, a loss-making company spending £250,000 per year on qualifying R&D expenses could receive a £83,375 tax credit.
Credits can be claimed in the two most recent accounting periods or up to 2 years after the end of an accounting period. To ensure you get the maximum credit amount, you’ll need to start preparing now.
Keep extensive records of potential projects, processes, and products likely to qualify for the credits. Be sure to include all documentation and expenses to explain the costs.
To make things easier, keep projects organized and put all supporting documentation in a single place. Do your best to isolate the expenses you might claim in a way that makes sense for your current operations.
Case studies
Find out how to maximize your tax credits
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