R&D Tax Credits
The government introduced R&D tax relief in 2000 to encourage greater investment in innovation in the UK by rewarding innovative companies with a generous tax incentive. Since its introduction, the rate of R&D tax relief has gradually increased as the government continues to incentivise investment by UK companies.
How does R&D tax relief work?
For a small or medium sized company (‘SME’) qualifying R&D costs will receive tax relief via a 230% corporation tax deduction, compared to 100% for non-R&D expenditure (i.e. an additional 130% deduction for qualifying costs).
Where the company is in profit, R&D relief will reduce the corporation tax liability, with an effective tax saving of 24.7% of the R&D qualifying costs.
Where the company is in a loss position, it can be possible to surrender the loss, to the extent it is created by the R&D costs, for a repayment of tax from HMRC at the rate of 14.5%. The effective cash repayment where the R&D loss is surrendered for cash is 33.35%. For every £100 spent on qualifying R&D it can therefore be possible to receive cash back from HMRC of £33.35.
Larger companies can qualify for R&D relief under what is known as the ‘RDEC’ scheme, albeit the RDEC scheme is less generous than the ‘SME’ scheme with an effective tax saving of approximately 10% based on current rates.
What counts as R&D?
The criteria for a qualifying R&D project is widely drawn. Whatever size or sector you operate in, if your company is taking a risk to ‘resolve scientific or technological uncertainties’ then you may be carrying out activities that qualify for R&D tax relief. If the following involve an element of risk and uncertainty, they are likely to be qualifying R&D projects:
- Creating new products, processes, or services.
- Changing or modifying an existing product, process, or service.
If your team have been pushing the boundaries of how to problem solve within your industry, it is possible that they have been undertaking qualifying R&D. Don’t worry if your R&D project was not successful, as unsuccessful R&D projects also qualify for relief.
Do you consider your business has:
- Filled a gap in the market / technology?
- Improved processes / products / materials / devices / systems / services?
- Materially changed things that already exist for the better?
- Broken the mould?
- Substituted traditional materials for greener more environmentally friendly ones?
If the answer to any of these is yes, you should contact HURST and we can explore the R&D opportunity further with you.
What costs qualify for R&D tax relief?
Costs related to the R&D project that will typically qualify for R&D relief include:
- Staffing costs for employees involved in the R&D (salary, employer’s pension contributions, employer’s NIC).
- Subcontracted out R&D activities, for example development work or testing.
- Consumable costs such as materials, water, fuel, and power.
- Software used in the R&D.
- Payments to an external staff provider for staff involved in the R&D.
Are there any time restrictions on claims?
R&D claims under the ‘SME’ scheme and the ‘RDEC’ scheme must be submitted to HMRC within two years of the end of the company’s accounting period.
Why use HURST?
With highly experienced R&D tax specialists, HURST has already helped many businesses to access these benefits, helping to generate significant savings and cash flow benefits. We can help you identify any qualifying activities, quantify your qualifying expenditure, and agree your claim with HMRC.
All companies should explore the possibility of making R&D claims. Assuming that only companies in the science and technology sectors are entitled to R&D tax credits can be a costly mistake. Qualifying R&D can exist in all industries, you don’t need men in white coats working in laboratories to qualify.