What are Research & Development tax credits and can you claim them?

Research & Development

The government’s Research & Development Tax Credit incentive is designed to encourage innovation in UK businesses. Perhaps you’ve never heard of them before. Or maybe you have heard of Research & Development (R&D) tax credits but not really understood what they are or if they apply to your business. 

In this article, Chorus Accounting MD Martin Cavey explains; what SME R&D tax credits are, what SME businesses can claim them, and the key things you need to know for the best chance of making a successful claim. 

We can’t lie – the full HMRC guidance about the incentive is technical and complex. That’s why our overriding advice if you are hoping to make a claim for Research & Development Tax Credits, is to speak to an expert before you incur any costs. 

So let’s dive in.

What are R&D Tax Credits?

Research & Development Tax Credits is a UK government incentive scheme administered by HMRC to reward innovation and development projects carried out by UK businesses. The R&D may be investigating a new process, product or service. Or may be improving an existing one. But remember, in order for your project to be considered it must be documented. 

How do R&D Tax Credits work?

Broadly speaking, Research & Development Tax Credits work by identifying the expenses incurred on a qualifying project to create ‘enhanced expenditure’ of up to 130% which can then be used to offset Corporation Tax or can be turned into cash and reinvested into the business. 

By investing more into additional qualifying R&D projects, you increase the amount of additional tax credits you can claim. 

You cannot claim any expenditure which you invoice a client for and if you pay a contractor, the amount you can claim is reduced to 65%.

What companies are eligible to claim R&D Tax Credits?

There are different types of R&D relief but for the purposes of this article we are focusing on SMEs. In order to be eligible for R&D Tax Credits your business must be an incorporated company (a limited company subject to Corporation Tax) with less than 500 staff and meeting HMRC rules regarding turnover and balance sheet limits. 

You cannot claim R&D Tax Credits if your business is not incorporated (i.e. if you are a Sole Trader or Partnership). 

What counts as R&D?

The definition of R&D is broad and can be relevant to any business or sector. You must be able to show that you are undertaking work which seeks to address a problem or uncertainty within your industry. And that it cannot easily be solved by an expert within your field.

If your business is taking a risk by exploring new ways to improve a service, product or process, or to create a whole new approach through the use of science or technology, you may well meet the R&D criteria.

As we’ve previously mentioned, if you are reading this and think you may qualify, it’s worthwhile seeking specialist advice. 

How much are R&D Tax Credits worth to your business?

At the time of writing in November 2021, the latest available statistics from the government indicate:

  • As of the end of March 2020 an estimated 85,900 R&D Tax Credit claims had been submitted.
  • This represents an estimated increase of 16% from 2019 claims – of these in the region of 76,225 claims were submitted by SMEs.
  • The estimated value of the SME claims to the end of March 2020 is £4.4 billion.
  • London and the South East account for the majority of submitted claims.
  • Since the introduction of the scheme, SME claims have increased year on year.

But what does this mean for your business? How much could R&D Tax Credits be worth to you?

As you would probably expect, the answer is not a simple one.

Qualifying expenditure includes, but is not restricted to, staffing costs, consumables and materials such as heating, lighting and power, some types of software and some payments to trial participants (i.e. if you have to pay for medical trial participants). In the most recent budget, the Chancellor announced changes to the qualifying expenses now allowing certain costs that had previously been excluded. 

Identified qualifying expenses are then used to calculate your enhanced expenditure. If the enhanced expenditure results in a taxable loss for Corporation Tax purposes you can choose to either;

  • Carry the loss forward; or
  • Convert the loss into cash for your business at 14.5% of either the enhanced expenditure, or the loss made – which is lower. 

If the enhanced expenditure does not result in a taxable loss, you benefit from a reduction in your Corporation Tax liability. 

Why claim R&D Tax Credits?

Research & Development Tax Credits are designed to foster innovation for UK businesses, allowing you to develop new products, services or processes or enhance existing ones. This presents the opportunity for you to increase reinvestment in your business, driving future growth or expansion. 

At the current time, it is also a valuable opportunity for you to obtain vital financial support if you have been adversely affected by the pandemic and have had to implement new ways of working in order to continue to trade.

Find out more about claiming R&D Tax Credits for your business

As shown in this article, although R&D Tax Credits are an attractive scheme for businesses, the qualifying criteria and claims process is highly technical and must be completed correctly in order for you to make a successful claim.

For help and advice about the documentation needed to support your claim, how to get advance assurance from HMRC that your claim will be successful, or for any other clarification about claiming R&D Tax Credits for your business, get in touch today