“R&D tax relief, started in 2000, was introduced to encourage innovation in UK’s companies by rewarding the firms in form of tax benefit and cash credits. They can act as a key capital injection within a company to improve the processes, hire more staff, further develop products or invest in its R&D activities.
Companies that invest in research and development, in order to improve their processes and products to even develop new product and processes generally qualify for these tax credits. As the guidelines are open for interpretation, navigating them can often be tricky but it also allows for qualifying activity to be found in every operation of a business.
In order to qualify, a company must:
- Be a UK registered limited company subject to corporation tax,
- have taken qualifying R&D activity as per HMRC’s guidelines,
- have an expenditure relating to the qualifying projects
HMRC’s definitions on R&D are purposefully broad. R&D tax relief is available to companies in construction industry, food industry, chemical processing, software developers, recycling technologists and many more. As long as you are developing new processes or products, or improving upon pre-existing products or processes, you’d likely qualify for R&D tax relief.
If you’re unsure if your project is feasible, or there is no clear information on how to achieve it in practice, you could be undertaking qualifying activities and resolving technical problems. Furthermore, within HMRC’s research and development definition, even abortive projects can qualify.
In order to quantify any R&D activity, we extract relevant costs from the following categories set out by HMRC:
- Staff Costs, including employer NIC and pension contributions and reimbursed expenses
- Consumables, including raw materials that were transformed during the R&D process as well as heat, light, power and utilities
- Subcontractors and workers provided through agencies/freelancers
- Some software costs, including licensing costs
- Payments to subjects of clinical trials
There are two main R&D tax relief schemes available in the UK; their application depends on the company itself;
SME scheme applies when a company with less than 500 staff on its payroll, and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category. There are a few factors, however, such as government grants and subcontracting that can push a company into an RDEC scheme, or a combination of RDEC and SME.
RDEC (Research and Development Expenditure Credit) mostly applies to companies with higher staff than 500, and either higher turnover than €100 million turnover or €86 million gross assets. This scheme allows a company to receive a 12% tax credit on its qualifying expenditure.
For a company that falls into the SME scheme, there are several options available:
- For a profit-making company, a corporation tax reduction can be received. This can range from 24.7% to 26% of qualifying expenditure, depending on the financial years in question.
- For a loss-making company, a cash credit can be received. This can be up to 33.35% of the qualifying expenditure.
- In the circumstances where R&D turns a profit into loss, a combination of both can be received by a company.”