Research and Development (R&D Tax Credits): What are they all about?

Whilst research and development (R&D) tax credits were first introduced in the year 2000, it is only recently the criteria to qualify has been expanded. Initially only available to small and medium enterprises (SME), within the last few years the scheme has now expanded to include large companies as well. Many people wrongly believe that you can only claim for R&D tax credits if you are making ground-breaking discoveries, however that is not true; to qualify, as long as you are making some advances you may qualify.

The basic definition is “work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology” and can include new products, improved products, and services or processes.

This tax relief has been identified as being under-utilized by many companies, and there is no reason not to research into to see if you may qualify, as the difference it makes to the company can be significant. Also, even if the expenditure happened with past accounting periods, you are able to claim within 2 years of the accounting period that it occurred, meaning you can still claim the tax credit for an R&D project that has been completed in the past.

What are they?

If a company is carrying out R&D then they may qualify for tax relief to reduce the company’s tax bill, or if the business is classed as an SME then a cash sum can be claimed instead, however it is up the company which they would prefer.

The Criteria for companies to qualify.

To be able to qualify the company must meet the following criteria:

  • Be either a SME (<500 employees, <£10million turnover) or a large company.
  • The company must be paying corporation tax.
  • The accounts must show the company is a going concern, and does not need R&D tax credits to survive.
  • Also the claim can only be for revenue expenditure and not for capital expenditure.

The Criteria for what constitutes revenue expenditure.

R&D revenue expenditure falls under the following things:

  • Wages of staff and employee costs of the people directly involved in the R&D project.
  • Subcontracted expenses for R&D expenditure.
  • Utilities – Including water expenses, fuel as well as electricity, however this excludes data costs and phone costs.
  • The materials used within the R&D.
  • Software expenses that is needed for the project.

How much can be claimed back?

The rules are often changed by HMRC, however for last year the following was true:

For an SME there is a maximum limit of €7.5 million that can be claimed on any one R&D project. The rate of relief or credit that is calculated incurred before 1 April 201 is 230%. Meaning for each £100 of expenditure that qualifies, the company could have the corporation tax reduced by £130 on top of the £100 spent. It is the company’s choice whether they receive tax credits or a cash sum.