Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation.
It is not solely aimed at ‘white’ coat research and development but also at ‘brown’ coat companies. The credits are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff, and ultimately growing.
The scope for identifying R&D is huge – it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
To benefit from R&D tax incentives, you must:
- Be a limited company in the UK that is subject to Corporation Tax- not necessarily paying Corporation Tax, can be loss-making.
- Have carried out qualifying research and development activities.
- Have spent money on these projects.
What is the benefit?
There are two ways to claim the benefit, which incentive you use to make an R&D tax credit claim will largely depend on whether you are an SME or a large company
- Fewer than 500 staff and
- either not more than €100 million turnover or €86 million gross assets.
- Most companies, including start-ups, fall into this category.
- Can obtain an R&D tax credit for 230% of R&D expenditure
- If not in profit, can claim a cash payment of 14.5% of the R&D credit
- Please note, there are new limits for accounting periods starting after 1 April 2021.
However, there are a few factors such as grants and subcontracting that can restrict an SME from accessing the SME incentive. This means you may need to make a claim via RDEC – or via both incentives.
- 500 staff or more and either more than €100 million turnover or €86 million gross assets.
- Need to claim the Research and Development Expenditure Credit (RDEC).
- Gives a credit to the value of 13% of qualifying R&D expenditure, but if paid as credit, is paid net of tax (currently 19%).
Overview of new SME rules for periods starting after 1 April 2021
There is a cap on the amount of the claim, a total of:
- Plus three times the total PAYE/NIC liability of the company (not just R&D related)
What costs can be included in your R&D claim?
To qualify for Research and Development, HMRC would expect the project or projects to have uncertainties and failures and the relevant costs would be included in the claim.
Research, development, and testing all form part of the claim, but once the prototype or project is finalised then any production costs would not be eligible, and the claim would be finished for that project. A company can make claims for multiple projects as long as all fit the criteria.
Specific costs that can be included:
- Staff costs, including salaries, employer’s NIC, pension contributions, and reimbursed expenses.
- Materials and consumables including heat, light, and power that are used up or transformed by the R&D process.
- Some types of software.
- Payments to the subjects of clinical trials.
- Subcontractors and freelancers.- however these expenses are restricted to 65% of the eligible amount.
If your company has incurred expenditure to create or search for a new method of producing or creating something that was not readily available on the marketplace it is possible that some of your expenditure will fit the above criteria.
R&D does not only concern the creation of physical items, it also includes processes, anything that can be considered innovative and did not exist previously could be considered. This is more likely if the research/ development was undertaken in-house by staff included on your own company payroll.
Your company may therefore benefit from having a review from one of our team to see whether a claim could be made. Please contact the Gerald Edelman tax team today.Back to top