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R&D Tax Credits Explained

R&D Tax Credits Explained

What is an R&D tax credit? It is a very niche part of the UK tax code which could bring your company thousands of pounds in tax relief.

What are R&D tax credits?

Introduced by the UK government in 2000, they are a form of tax relief for research and development work undertaken by a business, providing you with a tax reduction or a lump sum payment.

How do R&D tax credits work?

R&D tax credits are a tax incentive administered by HMRC and designed to encourage UK companies to invest in research and development projects. The tax credits can enable a company to reduce its tax bill or claim cash credits as a proportion of its R&D expenditure over the qualifying period.

You can make a claim each year. As well as the latest financial year, you can also claim retrospectively for the previous two years. For example, if the end date of your accounting period each year is March 31, you would need to submit your R&D tax credit claim for the accounting period April 1 2021 to March 31 2022 before midnight on March 31 2024.

Benefits of R&D tax credits

SMEs can have up to 27% of their R&D spending refunded, while larger companies are reimbursed 20% of their R&D expenditure.

Those levels of reimbursement can potentially transform a business by helping to increase productivity, stimulate innovation and have a positive holistic impact.

What is the meaning of R&D?

If you are trying to solve a problem and looking to overcome technological difficulties by creating new products and services, or improving existing ones, this could be classed as research and development. To qualify for R&D tax credits relief, the process does not even need to be successful.

The eligible R&D activities are:

  • Overcoming technical challenges
  • Creating and testing prototypes
  • Streamlining processes
  • Trialling new (or substituting) materials
  • Developing bespoke software
  • Trial and error
  • Industry firsts

What qualifies under R&D tax credits?

A proportion of the following costs qualify for R&D tax credits in relation to staff working directly on the R&D project:

  • Wages/salaries
  • Class 1 National Insurance contributions
  • Pension fund contributions
  • Payments to administrative or support staff (e.g. specialist cleaning staff) who work to directly support a project
  • Payments made to subcontractors and external workers
  • Payments made to clinical trial volunteers
  • The cost of materials consumed
  • Light, heat and power costs
  • Data licensing and cloud computing costs
  • Software licence fees

Who is eligible for R&D tax credits?

Claims can be made by UK businesses that fit the following description:

  • UK limited companies that are still trading
  • Companies of all sizes in all sectors
  • Both profitable and loss-making businesses

Your business needs to have a set of financial accounts, a qualifying R&D spend and be subject to Corporation Tax.

What are the R&D tax credits schemes available?

SMEs (small and medium-sized businesses) can claim through the R&D tax credits scheme. These are start-ups and businesses with fewer than 500 staff and a turnover of under £100million.

The RDEC scheme applies to large companies, which are defined as having more than 500 staff and generating turnover in excess of £100million.

How much is an R&D tax credits claim worth?

It depends on the size of your business, your R&D spend and whether or not you are making a profit.

A claim can result in a Corporation Tax reduction for profit-making SMEs, a cash credit for loss-making SMEs or a payable tax credit for large companies under the RDEC scheme.

What are the R&D tax credit rates?

For expenditure incurred from April 1 2023 onwards, a loss-making SME which spends more than 40% of overall costs on R&D, and is therefore classed as R&D intensive, will benefit to the tune of 27% – £27 for every £100 spent on R&D. A non-R&D intensive loss-making SME will receive an 18.6% benefit, and a profit-making SME’s benefit will be up to 21.5% depending upon its profitability. A large organisation claiming through the RDEC scheme can expect to claim back 20%.

For claims comprising expenditure incurred before April 1 2023, loss-making SMEs, whether they were R&D intensive or not, would benefit to the tune of 33.35% and profit-making SMEs would receive a 24.7% benefit. A large organisation claiming through the RDEC scheme would expect to claim back 13% for pre-April 2023 R&D expenditure.

How to calculate R&D tax credits

What you will need for an initial calculation is a clear idea, at the very least, of the specific costings of your company’s R&D activity, in regard to the personnel involved and materials used. You can use our R&D tax credits calculator to find out how much you could potentially claim. Don’t worry if you have to input estimated values into the calculator – we will establish the exact figures should you instruct us to handle your claim.

What to do before you claim R&D tax credits

As each claim comprises a retrospective look at the work carried out, you will need to be aware that providing a detailed recollection of the R&D projects your business has completed is required.

You will need clear records that can be accessed which break down specific costings. These costs include payroll for any permanent staff included in the R&D and sub-contractor invoices, specifically from the dates in question, retrospective across a maximum of the last two accounting periods.

Also important is a concise idea of any wasted materials encountered or prototypes you spent money on, as well as access to utility bill records.

Once you have sufficient information to hand that will give us a good indication of whether you have a viable claim, feel free to contact us for an initial discussion.

How to claim R&D tax credits

Be assured that making a claim is not something you need to do alone – randd are available to take on the burden for you.

Ensuring all boxes are checked in building a case that will guarantee you receive the greatest amount of R&D tax relief for which you are eligible is not easy – in fact, it requires numerous hours of painstaking research.

If you believe your company fits the criteria, joining forces with an R&D tax credits expert like randd can ensure the process evolves as smoothly as possible.

We will explain the scheme and tell you what we need to know, for example dates of the initial trial-and-error, when the first uncertainty happened, what that comprised and who was involved in the project.

In contrast to the vast majority of accountancy practices, at randd we have the resources to dedicate a specialist team to handling your R&D tax relief claim, putting in the countless hours of research required to ensure no stone is left unturned in building a case that will guarantee you receive the maximum value possible.

With expertise accrued over more than 15 years in this industry, we are ideally placed to identify and include every eligible activity – and we have successfully claimed back millions of pounds through our simplified, efficient procedure.

We have a proven track record of claiming back up to NINE times more R&D tax relief than an accountant, alternative agent or a self-submission claim would.

Expert advice on R&D tax credits

It is highly important for randd to manage our clients’ expectations and ensure our processes are undertaken flawlessly to avoid any unexpected obstacles along the way.

When you first contact us, what we will not do is state during your initial call with our team that you definitively have a qualifying claim because there are various restrictions we must work with.

For example, there may be certain elements you think are eligible to be included in a claim when they cannot be. The areas of expenditure need to be clearly managed and described.

We will also ask a lot of questions to make sure each claim is completely valid. If we have any concerns around that, your claim will not be put forward – so at randd we are careful never to tell anyone at the outset of the process they have a valid claim until we have made the required progress.

Firstly, you will have a pre-qualifying call with a member of our team who, if they deem the activity qualifies, will issue a contract. When the contract has been signed and returned, one of randd’s experienced R&D tax credits managers will contact you and book you in for an initial consultation within the first one-to-two week period depending on availability.

Once the claim has been qualified and we have obtained all of your R&D costings, we can calculate the value of your claim and submit it to HMRC.

If you would like to enlist randd’s help with making an R&D tax credits claim, call 01332 409 711 or email claim@randduk.com

Frequently Asked Questions (FAQs)

Research and Development Tax Credits are a tax incentive designed to encourage UK companies to invest in their research and development (R&D). The tax credits can allow a company to reduce their tax bill or claim cash credits as a proportion of their R&D expenditure over the qualifying period.

Yes. The Small to Medium Enterprise (SME) and RDEC schemes are designed to reward research and development activity by providing either relief on Corporation Tax, or cash credits even if the business is loss-making.

Due to the wide-reaching nature of R&D, 78% of businesses could be eligible for the scheme. If your business is trying to resolve scientific or technological uncertainties with some level of risk, you are carrying out the right type of R&D. It does not matter which sector your business is in.

If you have carried out eligible R&D activities within the past two years, then yes.

The easiest way to check if you qualify is to use our online calculator or get in touch with us.

If you are problem solving and looking to overcome technological difficulties by creating new products and services or improving existing ones, then you could qualify. Your R&D doesn’t even need to be successful.

No. There are two incentives to choose from so all businesses can apply. The first, the SME scheme, is for start-ups and business with fewer than 500 staff and turnover under £100 million. The second is the RDEC scheme for large companies, which is defined as having more than 500 staff and generating turnover in excess of £100 million.

This depends on the size of your business. If you are an SME you can claim up to 33% of your total R&D costs. If your business is profit-making this is seen as a Corporation Tax reduction, or if the business is loss-making then this is in payable cash credit and is not taxable.

A large company is  able to apply for 13% back through the RDEC scheme and this is awarded in the same way as SMEs.

For staff working directly on the R&D project, you can claim a proportion of their:

  • Salaries
  • Wages
  • Class 1 National Insurance contributions
  • Pension fund contributions

You can also claim for administrative or support staff who work to directly support a project (for example, specialist cleaning staff). But you can’t claim for clerical or maintenance work that would have been done anyway, such as managing payroll.

You can claim against 65% of the relevant payments made to an external agency if they provide staff for the project.

Yes, depending on whether you are claiming under the SME or RDEC scheme, you may claim for costs incurred through subcontracted work. There are certain conditions, but we can figure out all of that for you!

The company can claim for all consumable items used throughout the R&D process, including:

  • materials
  • utilities

The company cannot claim for:

  • the production and distribution of goods and services
  • capital expenditure
  • the cost of land
  • the cost of patents and trademarks
  • rent or rates

You can claim up to 2 years after the end of the accounting period the R&D expenditure relates to.