Research & Development Tax Credits Explained

Research & Development tax credits explained

Learn about the government’s new way of rewarding businesses that are going all the way and investing in innovation. 

What are R & D tax credits?

Research and development (R&D) tax credits are a UK government initiative that is designed to encourage companies in their plan to innovation.  This tax credit scheme represents an important source of cash to companies engaged in r&d activity. 

Who is eligible for R&D tax credits?

Any company operating in any industry can qualify for R&D tax credits, as long as it is in the midst of creating something new or significantly enhancing an existing process, product or service. The project does not necessarily need to be a success by any measure to qualify because it is the process of the innovation that is assessed. Your project must deal with a certain amount of uncertainty and your R&D progression must accelerate its feasibility for your project to qualify.

Even though, all sectors are eligible here is an example of the types of R&D activities that usually qualify for a better understanding:

–   Manufacturing

–   Software development

–   Engineering

–   Architecture

What are the benefits of R&D tax credits? 

Besides being a valuable source of cash for companies, R&D tax relief is accelerating the process by which companies are using science or technology to develop new products or services and look for new technical solutions. It also assures global economic growth for the UK as it secures future private R&D investments.  

How much can I claim? 

Companies who are first subject to the UK Corporation Tax are eligible to claim R&D tax credits. This means that the research and development costs in question must be funded by the UK-registered firm. According to the HMRC, R&D tax credit can be claimed after the end of the two years accounting period during which the innovative activities took place. 

Businesses fall under one of the two current schemes available to reward companies: the SME regime and the Research and Development Expenditure Credit (RDEC) regime for larger organisations.

  • The SME scheme 

A company can only claim under the SME regime if it has 500 employees and realising £100 million turnover or £86 million in balance sheet or more. If these qualifications are met, a company can claim between 15% and 33% of R&D costs.

  • The Research and Development Expenditure Credit (RDEC) scheme

Larger companies that do not meet the financial limits outlined above can claim up to 12% of their R&D expenditure back as tax credits.

It’s important to claim under the correct branch of the R&D Tax Credits scheme and if you find yourself claiming under both, our teams are here to help you.

How does the R&D tax relief work?

R&D tax relief is designed in a way that both successful and loss-making businesses can benefit by making a claim.

On one hand, successful companies can benefit from a reduction of their tax liability. This reduction is a direct consequence of the repayment of overpaid tax which is equal to 25 % of the R&D expenditure.

On the other hand, loss-making companies can make a R&D claim, but it would accentuate the loss incurred. This would hinder the company to make any future profits. The HMRC suggests receiving instead the loss attributable to the R&D company in exchange for a cash payment.

What costs can be claimed as part of an R&D Tax Credits application?

HMRC only allows the operational costs that have directly contributed to the progression of the R&D project to be included in the claim. Capital expenditure or money spent on fixed assets for example are not considered as part of the R&D expenditure.

Everyday operational costs involved from the time you started working on the research and development activity until its progression or conclusion can be included. Not to mention that these costs are multiplied then by the relevant R&D regime relief, which is determined by the business size and funding of the project.

–   Staff costs: it includes the salary of employees who were directly involved in the project, class 1 NIC and pension contributors.

–   Subcontractors: Generally speaking, only 65% of subcontractor costs can be included in the R&D but the ruling could differ depending on the company’s size.

–   Freelancers: Only 65% of costs made to external workers can be claimed.

–   Consumables: Certain transformable consumables like water, power and fuel are eligible for a tax relief.

–   Software: You can claim the cost of software who have been completely involved in the R&D process progression.

How can Veritas Noble help your company?

Our dedicated experts can walk you through every step of the complex application process. Let us handle the meticulous details and the large amount of paperwork so that there is no room for error and that your cash payment from the UK government is guaranteed. Get in touch with us today and learn more.

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