R&D Tax Credits: What You Need to Know
Research and development, or R&D, is at the core of ongoing innovation. Without R&D, everything we know would simply remain as it currently is and lack the ability to be improved, expanded, fine-tuned or evolved into something better. This is why R&D is crucial to every sector and prioritised by all types of businesses, ranging from small start-ups with the goal to create new and exciting products, to long-established companies that recognise the opportunity to further develop a process so that it responds to the ever-changing needs of its target audience.
Thanks to the Government being so passionate about maintaining the UK’s status as a nation of innovators, research and development receives a lot of support, particularly in the form of R&D tax credits. In this guide, we’re exploring the many forms research and development can take and why every business involved in this activity should know about R&D tax relief.
What are R&D tax credits?
Launched way back in 2000, the R&D tax credits scheme allows a business to claim back 33% of the money it invests into research and development projects. Despite the scheme having been around for quite some time, many companies don’t know about it, and even more have difficulty in applying for the reimbursement they’re entitled to. This can mean missing out on large sums of tax relief that could transform cash flow, profit margins, and the way in which a business plans a future of sustainable growth.
What counts as R&D?
The R&D tax credits scheme is open to all UK businesses that invest in research and development for the creation of any of the following:
Products
Services
Processes
Machinery
Software
Just as importantly, it doesn’t necessarily have to be the creation of something new, as the improvement and scientific advancement of existing products, services, processes, machinery and software also comes under the umbrella of research and development.
Additionally, R&D can enable a business to achieve incredible things, such as:
Solve problems faced by your target audience and customer base.
Optimise specific areas of operations, which can result in lower costs, streamlined production and logistics, and a reduced carbon footprint.
Establish a competitive edge by offering the very best version of a particular product.
Improve your company’s reputation and attract top talent.
Increase sales thanks to a superior offering.
Showcase your company’s dedication and focus when applying for finance and taking on investors.
Acquire patents for new products, ensuring sustainability within your marketplace.
Last but not least, R&D is identified as a process that aims to create or improve a product or service through experimentation and innovation, focusing on its functionality or operational system. The changing of a product in a solely aesthetic way will not count as research and development, as the activity needs to include the exploration of how it works rather than simply how it looks.
The two types of R&D tax relief
It’s always good to have options when it comes to business decisions, so we’re sure you’ll be pleased to hear that there are actually two types of R&D tax relief available:
SME R&D Tax Credits Scheme: This is designed for businesses with a turnover of less than €100 million and less than €86 million gross assets in their balance sheet. Additionally, the company must have fewer than 500 staff in order to qualify. This scheme offers the usual 100% deduction available for SMEs, plus the deduction of an extra 130% of qualifying costs from their annual profit. If the company makes a loss, it can claim a tax credit of up to 14.5% on the surrenderable costs. (If your company doesn’t qualify as an SME, it should still be able to claim a Research and Development Expenditure Credit (RDEC) of 13% on any qualifying R&D costs.
Unsuccessful R&D projects: Research and development comes with inherent risk, as the nature of the activity rarely has a guaranteed result. Still, if your R&D project is unsuccessful, the company can still claim tax relief even though it didn’t result in commercial success. The same goes if the R&D project is stopped partway through for any reason, as your company can claim tax relief on any research and development that actually took place.
Which sectors can access R&D tax relief?
It’s easy to assume that R&D tax relief is only for certain industries, such as manufacturing, pharmaceuticals and tech. However, this guide is full of good news, as we’re delighted to say that R&D tax credits can be claimed by companies in any sector.
The size and age of your company doesn’t affect your chances of accessing R&D tax relief either, nor does the nature of the R&D in terms of whether it’s for a specific client or your wider sector in general.
What activity does R&D tax relief cover?
It’s all well and good saying that R&D tax relief covers research and development, but what exactly does that mean from a cost perspective? Well, it actually covers multiple things, including staff wages, subcontractor and freelancer bills (up to 65% of the cost), materials used, and anything else required for the project to go ahead. When you add up all of these costs, the tax relief can be a very tidy sum.
How long does it take to apply for R&D tax credits?
HMRC puts a lot of focus into R&D tax relief because the Government realises just how important research and development is to the UK economy. That’s why it only takes 28 days or less for your application to be processed, with the total then being paid to your company either as a cash sum or a reduction of your corporation tax bill.
In addition, you can claim R&D tax relief for the last two completed accounting periods, essentially allowing you to receive a back payment for projects that ended many months ago.
The 2023 R&D tax relief reform
It’s important to note that there are some modifications being applied to the R&D tax credits system from 1st April 2023. These changes are being put in place to modernise the system by extending tax relief to cloud computing costs, refocusing the nature of the incentives, and improving compliance by deterring errors and fraudulent activity.
As R&D Tax Credits currently stand, research and development carried out overseas can be recharged to a UK claimant company. From 1st April 2023, this will change so that the R&D needs to physically take place within the UK. If your R&D is done in another country, such as through your own international group of companies or a third party, you probably won’t be able to claim tax relief on it.
On a more positive note, from April 2023 your business will be able to claim R&D tax credits on costs related to cloud computing and data. If you pay license fees for renting cloud computer storage space or purchase data that’s used for R&D purposes, these costs can be claimed against.
Due to numerous fraudulent claims being made for R&D tax credits over the years, as well as multiple errors, the Government is also making the system harder to abuse. To achieve this, from April 2023 all claims will need to be made digitally and the forms will ask for more details than the current system. The claim will have to be endorsed by a named senior official of your business, as well as naming any agents who have advised you. This is because many people claiming to be R&D tax credits advisors actually have no background in tax. (For peace of mind, the tax experts here at TreyBridge Accountants are proficient in tax advisory and tax planning services.)
You should hire a specialist to manage your application
Though the R&D tax relief scheme is positive in numerous ways, the application process can be very time-consuming, intricate and confusing. A myriad of financial figures need to be included and everything must be accounted for, categorised, justified and explained in detail, so getting it wrong will simply result in your time being wasted and your application being declined. Luckily for start-ups, entrepreneurs and companies around the UK, TreyBridge Accountants specialises in helping businesses to access every penny they’re entitled to through the R&D tax relief scheme.
In fact, the tax consultants at TreyBridge are so skilled at R&D tax relief applications that we can spot opportunities and details that many in-house accountants miss due to their technical nature. This means that even if you have your own finance department in place, we can work with it on your R&D tax credits application and ensure that you claim tax relief on every qualifying cost. This service brings an exceptional return on investment, as the amount you receive back from HMRC as tax relief can be quite extraordinary.
Apply for R&D tax relief today
Our tax advisors are ready to help you apply for R&D tax credits, as well as show you how to reduce your other tax bills through expert tax planning and financial management. To get started, call our Northern office on 01482 235575, our London office on 0207 885 0605 or fill in the contact form below.
Tagged as: Tax & Expenses
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