R&D Tax Credits Explained - What Are They? Who is Eligible?

R&D tax credits offer a significant financial incentive for businesses pursuing innovation and technological advancements, helping them offset expenses associated with pioneering activities. This article provides an explanation of R&D tax credits and outlines the eligibility criteria for businesses seeking to benefit from them.

What are R&D Tax Credits?

R&D tax credits are a form of government incentive aimed at promoting research and development activities within the UK. Essentially, R&D tax credits offer a mechanism for tax relief to companies involved in qualifying R&D projects. The objective is to foster innovation by reducing the overall financial burden on companies engaged in research activities.

R&D tax credits may be provided in two forms: a reduction in the company's corporation tax liability or a repayable cash credit. Regardless of the form, the fundamental principle remains the same: to alleviate the financial burden of innovation and to encourage continuous investment in R&D in the UK. 

The UK schemes are among the most generous in the world and successive governments have reiterated their intention to make the UK a hub for technological innovation.  

Types of R&D Tax Credits

There are two types of R&D tax credits available to businesses in the UK:

  • Research and Development Expenditure Credit (RDEC): Provides R&D tax relief as a taxable ‘above the line' R&D credit equal to 20% of the company's qualifying R&D expenditure. The credit is fully payable to companies with no corporation tax liability, once the relevant set-off steps have been considered. This scheme is now the default for companies of any size.
  • SME intensive scheme: Provides R&D tax relief for loss-making SMEs which meet the R&D intensity condition i.e., those that spend at least 30% of their total expenditure on R&D. The SME scheme works by giving an additional deduction of 86% of qualifying expenditure and the option to surrender the company's loss for a payable R&D tax credit equal to 14.5% of the loss.

R&D Tax Credit Eligibility

To claim R&D tax credits in the UK, there needs to be a qualifying company that carries out a qualifying project that involves qualifying activities.

Qualifying Companies

The company must be subject to Corporation Tax. For example, a limited company, joint venture or partnership.

Qualifying Projects

A qualifying project is one that seeks and advance in science or technology. 

Qualifying R&D Activities

The activities must directly contribute to the advance of science or technology. There are many types of qualifying activity, but here are some examples in the tech sector:

  • Developing new/improved data architectures
  • Implementing a new technology that improves upon existing capabilities e.g. reduced latency 
  • Improving existing software e.g. making it more sustainable
  • Resolving hardware issues
  • Customising existing software to suit specific business needs
  • Integrating existing software systems 

Qualifying R&D Costs

Several types of costs associated with R&D activities can be claimed under R&D tax credits:

  • Wages and salaries
  • National insurance contributions
  • Pension contributions
  • Software
  • Data licenses 
  • Cloud computing costs
  • Consumable items
  • Externally provided workers
  • Certain subcontracted costs
  • Capital expenditure

How to Apply for R&D Tax Credits

The application process for R&D tax credits can be complex and will require detailed documentation and evidence of R&D activities. Here are some general steps but you can read further detail here:

  • Identify Eligible Projects: Determine which of your projects qualify for R&D tax credits under UK tax law.
  • Compile Supporting Documentation: Gather all necessary documentation, including project descriptions, financial records, and evidence of R&D activities.
  • Complete the Application: Fill out the required forms and submit them to HMRC. It can be beneficial to work with a tax professional or consultant experienced in R&D tax credits to make sure this is all done correctly and on time. You don't want to miss the chance to claim a tax rebate. 
  • Submit the Claim: Submit your completed application, ensuring that all supporting documentation is included.

Conclusion

R&D tax credits are a valuable tool for businesses looking to innovate and grow. By understanding what these credits are and who is eligible, companies can leverage this incentive to reduce costs and drive forward their research and development initiatives. Whether you are a small startup or a large corporation, exploring the benefits of R&D tax credits can be instrumental in achieving your business goals.

If you think your business can make a claim, feel free to get in touch to understand the benefit to your business.