Research and development (R&D) tax credits are a form of tax relief to incentivise UK companies to invest in innovation. They can reduce your tax bill or you can claim payable cash credits as a proportion of your R&D expenditure.
R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Note that it is not just the traditional industries such as life sciences that undertake qualifying R&D. R&D can be undertaken in almost any industry and the definition of R&D is deliberately wide ranging to ensure industries are not discriminated against.
Small and medium sized enterprise (SME) R&D tax credit claims provide a deduction of 230% on qualifying R&D expenditure. This deduction reduces the amount of taxable profits subject to tax at 20% and therefore provides a cash benefit of c26%. Additionally, if a company does not have any taxable profits (i.e. has taxable losses during the year), there is an ability to surrender taxable losses (up to the 230% deduction) for cash back of 14.5%. This in effect provides cash back of 33.35%.
To be eligible to make an SME R&D tax claim your business must meet certain criteria:
be a UK registered trading company;
does not receive funding for its R&D activities (nor has the work being subcontracted to your business);
meets the definition of an SME (see below).
The SME R&D tax relief scheme is available to companies having less than 500 employees that satisfies one of the following conditions: revenue less than €100m or balance sheet assets less than €86m.
If eligible, you can typically claim R&D tax credits for your last two accounting periods.
The tax credits are calculated based on your R&D spend. Qualifying expenditure includes:
You may be eligible to make a ‘Large Company’ R&D claim (also known as an R&D Expenditure Credit (RDEC) claim) if you do not meet the definition of an SME, you have received funding or the work has been subcontracted to you.
If you would like us to review whether your business can make an eligible claim, please let us know.
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