R&D tax credits explained – Check your eligibility

Research and development (R&D) tax credits are one of the most lucrative and interesting government incentives put in place in the UK. The UK government encourages companies to invest in R&D. Through investing in research and development, UK companies have the opportunity to pursue  innovation, reduce their corporation tax bill, and receive reimbursed expenses. 

The R&D government incentive can be hard to wrap your head around at first. This article will tell you everything you need to know about corporation tax incentives, how to utilise them to benefit your business, and how to process your tax return to claim these benefits.

Table of contents

• Research and development expenditure credit explained
• Find out if your business is eligible 
• How much can I claim for R&D?
• Claiming research and development tax credits
• Dealing with HMRC

Research and development expenditure credit explained

R&D tax credits provide financial support to both small and medium-sized enterprises (SMEs) and larger companies in the UK. R&D expenditure credit refers to the money spent on research and development within a business, which can then be eligible to receive tax relief benefits or a cash payment at the end of the tax year.

These corporation tax incentives aim to encourage innovation, problem-solving, and creative thinking through supporting research and development. These payable tax credits can lower a company's annual taxable income and promote independence, learning, and knowledge sharing. 

R&D tax reliefs benefits explained

Research and development projects are a vital activity within the UK workforce, and tax benefits help create employment opportunities and enable business growth for companies that utilise R&D.

Through investing in research and development, businesses can:

• Create new products

• Develop innovative software

• Boost innovation

• Employ new systems

• Enhance overall productivity 

• Improve on an existing product

• Promoting employee independence and well-being

R&D is the key to solving technological problems and enhancing a company's knowledge base.

Find out if your business is eligible 

Payable tax credits are available to all sectors that participate in research and development activities. If your business has spent money on developing or improving science or technology, you will be eligible to claim back the total qualifying expenditure through tax computation. However, companies outside of the typical science and technology sectors can also be eligible in some cases. 

Sectors that qualify for R&D tax credits include, but are not limited to:

• Agriculture

• Care homes

• Hospitality

• Manufacturing

• Electrical engineering

• Medical science

• Technological engineering

When claiming tax relief, you must ensure that you meet the requirements to qualify before completing your tax return. According to HMRC, businesses must:

• Aim to advance science and technology

• Face uncertainties or a problem within their sector

• Face uncertainties that they have tried to overcome (not all projects need to be successful to qualify)

• Choose an R&D project that addresses an issue that can’t easily be solved or understood by a professional in the same field

How much can I claim for R&D?

There are two schemes available to UK companies: the SMEs scheme and the research and development expenditure credits (RDEC) scheme. Companies can claim qualifying expenditure used during R&D projects in their end of year tax return to be reimbursed for costs spent on researching and developing new technologies and solutions.

Tax credits are among the most generous tax breaks schemes available to businesses within the UK. The value varies depending on the claim and the resources used. Typically, R&D tax reliefs compensate 25% of qualifying expenditure. 

SME 

The SME company scheme provides research and development tax credit for small to medium-sized businesses. 

SMEs qualify if they have:

• Less than 500 staff

• A turnover of under €100 million or a balance sheet total under €86 million

SME R&D relief allows companies to claim:

• An extra 130% deducted off their qualifying costs from their yearly profit, as well as the normal 100% deduction, making a total 230% deduction

• A tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss

RDEC

The RDEC scheme is available to large companies but can also be accessed by SMEs in certain circumstances. 

• RDEC can be claimed by SMEs in certain circumstances when they have been subcontracted to do R&D work by a large company

• The RDEC scheme provides tax relief for 13% of qualifying R&D expenditure

Claiming research and development tax credits

What costs can be claimed for R&D?

You can claim any cost associated with an R&D project from the date your business began working on the project until you cease the research and development. Make sure to consider all costs associated with your research and development projects, including:

Staff costs:

• Salaries and wages

• Class 1 National Insurance contributions

• Pension fund contributions

• Administrative support or support staff specific to the project

• 65% of salaries for external agency employees who work on the R&D project 

Subcontractor costs:

• Charities

• Higher education institutes

• Scientific research organisations

• Health service bodies

• Individuals or partnership of individuals

Consumable items:

• Materials

• Utilities

Costs that cannot be claimed for R&D

• Production and distribution of goods and services

• Capital expenditure

• Cost of land

• Cost of patents and trademarks

• Rent or rates

How to claim R&D relief

To claim reimbursement through this corporation tax credit scheme, companies must disclose all research and development expenditure within their annual tax return. Large companies and SMEs must disclose all qualifying expenditures and salaries for externally provided workers who contributed to research and development projects.

When processing your tax return, you can claim up to two years of R&D expenditure after the end of the accounting period it relates to. So, to have a successful claim, make sure to include all relevant information and capitalised expenditure from the past two years.

R&D tax relief can be claimed by entering all expenditures into the CT600 tax return form. You can also use the online HMRC tax return service to support your claim.

Put your best claim together

To receive a net cash benefit through tax credits, you must accurately fill out your tax return form. To support your claim, the best way to do this is to calculate your R&D expenditure thoroughly and clearly state all costs, start and end dates, and other relevant information, such as descriptions of tasks carried out.

Work out when the R&D activity starts and ends

R&D activity starts when your business begins working on a project with the intention of resolving a problem. First, you will need to identify the problem that needs to be resolved and make sure there is not already an existing solution to it. Once this is confirmed, you can begin your research and development on the topic.

The R&D activity ends when you have solved the problem, or you stop working on it. The activity that you claim R&D tax relief for should end once you have a working solution or prototype that solves the problem. This is before the production stage of any device, prototype, or software.

R&D can restart if you find another related scientific or technological problem once you have started the production stage. In this scenario, you can claim further R&D while resolving this problem.

Calculate your R&D expenditure

Accurately calculating your annual turnover and total R&D expenditure is essential when submitting a claim to receive an accurate tax refund. A tax credits calculator is also available online on the HMRC website to assist with calculating your tax credit claim.

To accurately calculate your R&D expenditure for tax purposes, you will need to follow the steps below:

1. Work out the costs that were directly attributable to R&D

2. Reduce subcontractor or external staff provider payments to 65% of the original cost

3. Add all costs together

4. Multiply the figure by 130% to get the additional deduction into your tax computations

5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure you can enter into your tax return

Details you’ll need to support your R&D claim

When submitting your tax credit claims, you will need to include a detailed description of each aspect of your qualifying projects. It is important for tax purposes, to clearly identify and state the purpose of the qualifying projects and justify all costs used in the process to receive this tax incentive. 

To help your tax credit claim and receive the additional tax deduction, make sure to provide information that explains how your project qualifies – Such as the methodologies used during R&D, and the outcome of each aspect of the research and development process. 

Examples of this include:

• “Looked for an advance in science or technology and aimed to achieve this advance.”

• “Had to overcome scientific or technological uncertainty.”

• “Could not easily be worked out by a professional in the field.”

You’ll also need to include:

• Start and end dates of the accounting period relating to the R&D activity – should be the same dates as the period covered by your CT600 return

• Your ten-digit company unique tax reference (UTR) number

• The total amount of tax relief you’re claiming

• A breakdown of your qualifying R&D costs

• Your unrelieved trading loss for the claim period

Dealing with HMRC

Dealing with HMRC can be daunting at first, but Bloom is here to help. When submitting your tax return, it is important to follow all guidelines and procedures outlined by HMRC. This includes disclosing all relevant financial information, completing identification checks via the online portal, and detailing all relevant information supporting your claim. 

Additional guidance and information on completing your R&D tax relief claim can be found here.