R&D tax credits and relief

Research and development tax credits, otherwise known as R&D tax credits, were conceived by the government as a stimulus for innovation among British businesses.

They make it possible for firms engaged in genuinely innovative research to reduce their corporation tax bills by significant amounts. This frees up funds for reinvestment into the business or simply to keep it buoyant during the development of new products and services.

R&D tax explained

R&D tax credits: there are two main strands of tax credits for research and development – the main scheme, aimed at small and medium-sized businesses (SMEs) and research and development allowances for larger companies, known as RDEC.

R&D tax relief: research and development tax relief is generally applicable to engineering businesses, software firms, technology startups, green energy businesses and other such sectors. But, perhaps surprisingly, it can also apply to creative firms, such as visual effects houses in film production.

If you think your project might qualify for R&D relief, get in touch to discuss the eligibility criteria with one of our R&D tax relief specialists.

R&D tax relief for SMEs

If yours is a small to medium-sized business with fewer than 500 employees, turning over less than €100 million, or with a balance sheet showing less than €86m, you meet the base criteria to apply for R&D relief.

The next test you need to pass is around the eligibility of your particular project:

  • Does it set out to achieve an advance in science and technology?
  • Did you overcome uncertainty during the research?
  • Does it address a problem that an experienced professional in the same field couldn’t work out for themselves?

Clearly, these tests are nuanced and complicated, relying on case-by-case judgement rather than absolute black-and-white rules.

If you do pass the above tests, and HMRC agrees that your project does qualify, you’ll be able to deduct an additional 130% of qualifying costs from your yearly profit, on top of the standard 100% deduction, amounting to a total deduction of 230%.

R&D tax relief for large companies

Larger businesses aren’t eligible for research and development relief in the same way as SMEs. Instead, in April 2016, R&D expenditure credit (RDEC) was launched, replacing something known as ‘the large company scheme’.

It applies to companies above the employee, turnover and balance sheet thresholds above but applies the same criteria to decide the eligibility of the R&D project itself.

If your project qualifies, you might be able to claim relief on:

  • costs for staff engaged directly with the R&D work
  • expenditure on subcontractors undertaking R&D
  • consumables connected to the R&D project
  • and the costs of production and distribution.

RDEC is calculated at 12% of any qualifying R&D expenditure incurred after 1 January 2018.

If your business made a loss you’ll be entitled to use the credit to cover your liability. If you made a profit, on the other hand, it will take the form of a cash payment.

Making an R&D claim

Once you’ve decided that your research project might qualify for either the R&D relief SME scheme or RDEC there are two stages to making a claim.

First, if necessary, we can work with you to put the case to HMRC on a provisional basis for an in-principle agreement that it meets the standards set.

Then, as part of your corporation tax return, we’ll submit the claim formally to HMRC.

It’s still possible it could be rejected at the final stage if another firm happens to have undertaken substantially the same research and is also claiming for it.

Finally, you’ll receive your credit, usually within a month or so of submission.

Next steps

Contact us for advice on your eligibility for, and the process for claiming, r&d tax credits or relief for your business.

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R&D tax claims

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R&D capital allowances

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R&D qualifying expenditure

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HMRC RDEC guidance

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