How Research and Development Tax Credits Work?
Research and development tax credits are designed to encourage and reward innovation and business growth. Aimed at companies that develop or enhance new products, processes or services, R&D tax credits can offset much of your research and development expenditure.
Despite the benefits R&D tax credits bring, few people are actually aware of them. Indeed, most business owners of small businesses and large companies haven’t heard of the R&D tax credits scheme and certainly don’t know if their company qualifies for it.
Luckily, help is available. At Audeo, our in-house experts are on hand to ensure you can make an R&D tax credit claim from the grants scheme. As well as confirming your eligibility, we’ll help you navigate the complex claims process and obtain the tax credits & UK government grants your company deserves.
What are research and development tax credits?
R&D tax credits (or tax incentives) enable companies to recoup at least some of the money they spend on research and development. If their R&D tax credit claim is successful, tax credits are awarded in one of two ways. Business can either choose to receive cash credits or to take a reduction in the amount of corporation tax owed.
Whichever option a company chooses, R&D tax credits essentially cover some or all of the expenditure associated with the company’s R&D activities. This financial benefit incentivises companies to develop new products, processes and services, as well as to enhance existing ones.
As a result, the R&D tax credit scheme is said to reward innovation and facilitate business growth. By making a successful R&D tax credit claim, companies can channel more resources into research and develop and potentially take their business to new heights.
Who is eligible to receive research & development R&D tax credits?
Like all finance options, the R&D tax credit scheme has strict eligibility criteria. In order for the grant awarded in research and development tax credits, corporate applicants will need to show that they meet these criteria. Currently, companies need to meet the following benchmarks in order to be eligible for R&D tax credits:
- Be an established limited company in the UK (includes Northern Ireland too)Be eligible to pay corporation tax
- Has undertaken qualifying R&D activities
- Has spent money on facilitating these qualifying R&D activities
For the majority of venture capitalist & small business grants, proving your status as a limited company within the UK and your liability for corporation tax is fairly straightforward. However, evidencing the undertaking and financing of qualifying research and development activities is a little trickier.
You’ll notice that the eligibility criteria uses the term ‘qualifying’ in relation to the R&D activities which fall under the scope of the tax credit scheme. This means that research and development tax credits can only be claimed for certain R&D costs & activities. However, the definitions used by Her Majesty’s Revenue and Customs (HMRC) are relatively broad when it comes to defining what qualifying R&D activities actually are.
What are the qualifying research and development activities?
Qualifying R&D activities typically involve attempting to ‘resolve scientific or existing technological uncertainties’, although this definition doesn’t provide much clarity for business owners. In fact, any funded attempt to enhance existing processes, products or services or to invent new ones, could be said to fit these criteria.
If your company has spent money on improving its products, its services or its in-house processes, it’s likely that these activities will be deemed to be qualifying under the R&D tax credits scheme. Furthermore, if your firm has carried out these R&D activities on behalf of a client, this can be counted towards your research and activity development too.
Once you’ve established that your company has funded qualifying R&D activities, you’ll need to assess whether this funding is defined as qualifying expenditure. Again, this definition is intentionally broad and generally enables companies to justify the following costs as qualifying expenditure in relation to R&D activities:
- The cost of staff to undertake qualifying R&D activities, including salaries, pension contributions, employer’s National Insurance contributions, and reimbursable staff expenditure.The cost of freelancers and/or subcontractors when carrying out qualifying R&D activities
- Some types of software
- Consumables and materials that are used or transformed due to qualifying R&D activities, including light, heat and/or power
- Remuneration to participants in clinical trials
Due to the wide range of qualifying activities and expenditure, the R&D tax credit scheme has a broad application. It can be used by businesses operating in all sectors and is open to companies of all sizes. Indeed, your research and development needn’t have even been successful in order for you to be eligible!
Are there different types of R&D tax credit schemes?
Yes. Currently, there are two different R&D tax credit programs; the SME R&D tax credit scheme and the Research and Development Expenditure Credit (RDEC).
The SME scheme is funding opportunity is designed for small to medium-sized enterprises (and grant for new businesses) that have a turnover of less than €100 million or less than €86 million in gross assets and fewer than 500 staff. The RDEC scheme is aimed at larger companies and accepts applications from companies with more than 500 staff, €86 million in gross assets and with a turnover of more than €100 million.
However, the SME R&D tax credit scheme does not cover the same R&D expenses as the RDEC scheme. Under the SME scheme, subcontracting is not usually considered to be a qualifying cost, for example, and cannot be claimed as such. If SMEs want to include expenses that are not considered qualifying costs under the SME scheme, they will need to apply to the RDEC scheme instead. Alternatively, SMEs could make two separate claims; one to the SME R&D tax credit schemes for qualifying costs and one to the RDEC scheme for qualifying costs that are not available under the SME scheme.
When can you claim research and development tax credits?
You can claim R&D tax credits at any time after you have funded qualifying research and development activities. However, many companies choose to make a claim at the end of their accounting periods. This enables them to assess their yearly R&D expenditure and make a claim for all qualifying costs within this timeframe.
If you’ve never made a tax credit claim for R&D projects before, you’ll be pleased to know you make a retrospective claim. First-time applicants to the R&D tax credit scheme can apply to have their qualifying R&D expenses from the last two years taken into account, which significantly increases the financial benefits you can gain from making an application.
How to claim R&D tax credits
Now you know how research and development tax credits work, you’ll want to know how you can make an application. As you can see, the application process can be complicated and time-consuming, particularly if you’re unfamiliar with it. As many accountants are also unaware of the details of the scheme, business owners can spend an inordinate amount of time trying to determine if their R&D spend makes them eligible for tax credits.
At Audeo, we understand the importance of claiming R&D tax credits to aid business development, and we’re highly familiar with the claims process too. In fact, we have a 100% success rate when it comes to submitting R&D tax credit claims to HMRC.
Our in-house team, along with expert accountants and advisors, will examine your expenditure to determine which costs are qualifying under the R&D tax credit schemes. Whether you’ve undertaken a single R&D activity or multiple R&D projects in your business plan, our specialist team will ensure all qualifying costs are cited on your application.
Most businesses are already carrying out activities that qualify them for research and development tax credits, although they may not realize it. To find out if you could be eligible, contact Audeo now on 020 3105 5887 or email us at hello@weareaudeo.com
