R&D tax credits explained

Recent changes to Research and Development (R&D) tax credits will help boost innovation in the UK. Partly a move to bolster the UK’s productivity in the wake of Brexit and the pandemic, and partly to strengthen its position as a credible leader in the field of science and technology, the increase is a welcome boost to businesses in a position to benefit from it.

What are R&D tax credits?

Research and Development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to reinvest in accelerating their R&D, including hiring new staff and procuring equipment and/or machinery. The relief can be claimed by a range of companies that seek to make an advancement in their particular field and can even be claimed on unsuccessful projects.

The government’s R&D criteria are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’, then you may be carrying out qualifying activity. The activity needs to be attempting to make an advance in science or technology (with the exclusion of advances in social sciences such as economics or in a theoretical field such as pure maths). The project must also relate to your company’s business or trade – either existing or something you intend to work on in the future depending on the results of the R&D.

How to find out if you are eligible for R&D tax credits

You will need to demonstrate:

·         How you attempted to make an advance in a particular field – either a new process, product or service or improving on an existing one

·         The adversity you encountered and how you overcame it

·         How the advances benefit the sector as a whole, not just your own business

·         That the solution you are trying to reach could not be easily worked out by a professional in that field or if someone has worked on this particular project – how they failed and how you tried to overcome this

·         Scientific or technical uncertainty and how you tried to overcome this

·         The successes and failures you encountered

How does R&D tax credits work?

R&D tax credits allow up to 33.35% of a company’s R&D expenditure to be recovered either as a reduction in Corporation Tax or as a cash repayment. The R&D tax credit claim is filed via the annual Corporation Tax return (CT600) – there is no standard format for supplying supporting information, but HMRC sets out the type of information they need to see to support a claim. This includes a breakdown of the qualifying expenditure alongside a clear description of activities that qualify for R&D. It is important to include information on why you consider your project(s) to be R&D activities, along with a summary of costs relating to each project. If you have already filed a Corporation Tax return and want to make an R&D tax credit claim, you will need to amend the return to include this.

You need to ensure that you include as much information as possible to demonstrate to HMRC that you have given due attention to preparing your claim with sufficient records to demonstrate that the activities you are claiming for come under the area of R&D. This will ultimately help you to avoid an enquiry by HMRC.

Can SMEs and large corporations apply for R&D tax credits?

The scheme under which you apply will depend on the size of your business. For an SME in profit, the minimum rate of relief in Corporation Tax liability for the year is 24.7%. Relief is given by applying an enhanced deduction to taxable profits of 130% of the eligible spend on R&D. Loss-making SMEs receive this in the form of a cash payment.

Larger companies who fail to meet the eligibility criteria for the SME scheme can apply for the Research and Development Credit (RDEC). This is a standalone credit that is taken into account as a receipt when calculating trading profits. The current rate for the RDEC is 13%.

We can help

At Mercer & Hole, we understand exactly what HMRC are looking for in terms of supporting information and can help you to ensure you don’t miss out on valuable tax benefits. As with any tax returns, the devil is in the detail and if you are unsure as to whether the projects you undertake qualify or simply need some advice, please don’t hesitate to contact the Corporate and Business Tax Team.