What are R&D tax credits?
Research and development (R&D) tax credits are an HMRC initiative designed to support innovative businesses in science and technology. Eligible businesses can benefit from a tax relief of up to 33% of qualifying expenditure, or a cash grant.
According to FSB Funding Platform, approximately 20,000 R&D tax credit claims are made every year by UK businesses, with small businesses claiming £57,000 on average. From IT to construction, businesses across a range of sectors can benefit from the initiative.
Who can claim?
You must be a limited company and registered to pay corporation tax in the UK. Sole traders, partnerships and public liability companies are not eligible for the scheme.
Which type of R&D relief is right for me?
There are two different types of relief available depending on the size of your business and if you’ve been subcontracted.
1. SME R&D tax relief
The small and medium-sized research and development relief is the most common option for small businesses. You must have less than 500 staff and a turnover of less than £100 million.
This scheme allows you to deduct an extra 130% of qualifying costs from your yearly profits, as well as your normal 100% deduction, totaling 230%. If your company is making a loss, you can claim a tax credit worth up to 14.5% of the surrenderable loss.
2. Research and Development Expenditure Credit (RDEC)
RDEC is aimed at larger companies, but as a smaller business, you can claim it if you’ve been subcontracted to do R&D work for a large company. From 1 April 2020, it’s 13% of qualifying R&D expenditure.
What qualifies for research and development tax credits?
You might be wondering whether your project fits the bill and if it's qualifying R&D activity. HMRC has a set of criteria when it comes to eligible projects. The relief can be claimed by a range of companies and sectors, so let’s take a look at what you need to consider.
Science and technology
R&D is all about advances and innovations in the science and technology space, so your project must fit within this.
Does it relate to your trade?
Whether it’s an existing part of your business you’re developing or a new area you want to start as a result of your project, you’ll need to show how the R&D project will fit within your business. For example, are you:
- Working on a new product, process or service?
- Making improvements to existing products, processes or services?
- Trying to solve a technical problem?
- Developing software?
If so, your project might be a good fit.
Explaining your project
As part of your application process, you’ll need to explain the ins and outs of your project, answering questions like:
- How will it advance the field?
- How have you tried to overcome uncertainty?
- How will your project benefit your field as a whole, rather than just your business?
- Have professionals in the industry been unable to easily solve the problem?
- What attempts have been made already to solve this problem? How have they failed?
- What research, testing, and analysis were needed in the development process?
- What successes and failures did the project have?
For your project to be eligible, you also need to show that you don’t already know about the advance or how to achieve it. This is the ‘uncertainty’ element.
My project was unsuccessful. Can I still claim?
You may still be eligible to claim if your project didn’t go as planned, as long as it meets the above criteria. It’s always best to discuss this with an R&D tax specialist for professional advice.
What can I claim?
When you’re working out the costs you can claim, remember that everything must be directly related to R&D activities. Costs can be claimed from when the project starts (when you start working to resolve the uncertainty) until you develop or discover the advance, or the project stops.
For SME R&D relief, you can claim:
- Staff costs for those working directly on the project, as well as admin or support staff for the project, and 65% of relevant agency staff costs. This includes a proportion of wages, Class 1 National Insurance contributions and pension contributions.
- 65% of subcontractor costs.
- Software licence fees.
- Consumable items like materials and utilities.
- Clinical trials volunteers if you’re in the pharmaceutical industry.
There are some exceptions that can’t be claimed for, such as patents, trademarks, rent, rates, as well as the production and distribution of goods and services.
How far back can you claim R&D tax credits?
You can make a claim for R&D relief up to two years after the end of the accounting period it relates to. You’ll need to file an amended corporation tax return. Depending on the type of relief you’re claiming, rates may differ.
How to calculate your R&D tax credit
- Work out your eligible R&D costs
- Reduce subcontractor or agency staff costs to 65% and add this onto your costs
- Multiply by 130% to get the additional deduction
- Add this to the original R&D expenditure figure – this will give you your enhanced expenditure figure that you need for your tax return
How to make your R&D tax credit claim
At FSB Funding Platform, we simplify the R&D claim process for FSB members by putting you in touch with experienced specialists that can help you make your claim:
- Initial free 30-minute consultation to determine your eligibility
- If you’re eligible, we’ll request the R&D accounting information from you – one simple form
- Arrange and attend a teleconference or meeting to discuss required information
- Conduct an assessment of the R&D projects and related expenditure and confirm claim potential
- Prepare drafts of R&D Tax Relief Innovation Report and R&D Tax Claim Details for you to review
- Submit the R&D Tax Relief Innovation Report to your accountant for filing with the CT600
- Upon submission of the claim, we raise an invoice for the agreed fee percentage based on the value of the relief
As a business owner, you also have the option to apply using HMRC’s online service instead of getting help from a specialist. While this means you retain more of the cash payment on a successful claim, it’s likely going to take you longer to complete the process.
The UK government has published a 45-page R&D guide for small businesses to help you navigate the scheme.
Ready to get started?