Which Companies are Eligible for R&D Tax Relief?

Research and Development (R&D) tax relief is a significant incentive aimed at fostering scientific and technological innovation. It encourages businesses to invest in R&D by offering financial benefits that can be substantial. But which companies are eligible for this relief? In this article, we'll delve into the specifics of R&D tax relief, shedding light on the qualified activities and providing guidance on determining eligibility.

Understanding R&D Tax Relief

R&D tax relief is available to companies engaged in innovative projects that seek to advance knowledge or capabilities in their field. This relief can be claimed on qualifying R&D expenditure, offering either a reduction in Corporation Tax or a cash payment to the company. The scope of R&D tax relief is quite broad, encompassing a variety of sectors and activities.

Qualified Activities for R&D Tax Credit

For a company to benefit from R&D tax relief, its activities must qualify as R&D under the guidelines provided by HMRC and the BEIS. The key criteria include:

  • Advancement: The project must seek to make an advance in science or technology. This could mean developing new products, processes, or services, or improving existing ones.
  • Uncertainty: The company must face scientific or technological uncertainty in achieving the advance. The uncertainty should be such that a competent professional in the field cannot readily resolve it.
  • Systematic Work: The projects must involve systematic work, such as testing, designing, or prototyping, directed at overcoming the uncertainty.
  • Qualified Personnel: The work should be carried out by personnel who are competent in the field, including scientists, engineers, or technologists.

Examples of Qualified Activities

Numerous activities can qualify for R&D tax relief, including but not limited to:

  • Developing new software. This could be when the software development is the main goal of the project or when software is developed as part of a larger R&D project. 
  • Developing new hardware solutions
  • Creating prototypes or running trials
  • Conducting feasibility studies
  • Designing and testing new materials or products
  • Developing innovative manufacturing processes
  • Improving energy efficiency

Do I Qualify for R&D Tax Credit?

Determining eligibility for R&D tax credit involves assessing whether your company meets specific criteria. 

Size of the company

The type of R&D tax relief available often depends on the size of the company. There are two main schemes:

  • Small and Medium Enterprises (SMEs): Loss-making companies with fewer than 500 employees and either an annual turnover under €100 million or a balance sheet total under €86 million. SMEs typically receive more generous relief under the SME R&D tax relief scheme.
  • Large Companies: Companies that exceed the SME thresholds or are profit making can apply for the R&D Expenditure Credit (RDEC) scheme, which offers a lower rate of relief but can be claimed by any company.

Nature of the project

To qualify for R&D tax relief, the project must aim to resolve scientific or technological uncertainties. The project should also be intended to result in an advance in the field.

Eligible expenditure 

R&D tax relief can be claimed on various types of expenditure, including:

  • Salaries and wages of employees directly involved in R&D
  • Materials and consumables used in R&D activities
  • Software and utilities directly related to R&D
  • Subcontracting costs for R&D activities conducted by external parties

Full details of the eligible costs can be found here.

Documentation

Maintaining proper documentation is crucial in claiming R&D tax relief. Companies must keep detailed records of the R&D activities, expenditures, and the nature of the advancements and uncertainties addressed.

Summary

R&D tax relief offers a valuable opportunity for companies to reduce their tax liabilities while promoting innovation. By understanding the qualified activities and assessing the eligibility criteria, businesses can effectively leverage this incentive to support their R&D efforts. Whether you're an SME looking to expand your research capabilities or a large enterprise aiming to innovate, R&D tax relief can be a significant boost to your financial and innovative goals.

For companies unsure about their eligibility or the specifics of qualified activities, consulting with a tax advisor or R&D specialist can provide clarity and ensure that you maximise the available benefits. Embracing R&D tax relief not only fosters growth but also paves the way for advancements that can transform industries.

If you want to learn more please get in touch or read more about how we can help with R&D tax credits.