What is R&D tax credit? 

Unleashing Innovation: A Comprehensive Guide to R&D Tax Credits in the UK 

Research and Development (R&D) activities are at the core of innovation, driving advancements across industries. To encourage businesses to invest in R&D, the UK government offers R&D tax credits. These tax incentives provide valuable financial benefits to companies engaged in qualifying R&D projects. In this blog post, we delve into the intricacies of R&D tax credits in the UK, specifically focusing on the R&D tax credits available under the SME scheme and the Research and Development Expenditure Credit (RDEC) scheme. Let’s explore how these schemes work, who can benefit from them, and how to maximise this opportunity.

Understanding R&D Tax Credits 

Definition and Purpose of R&D Tax Credits 

R&D tax credits are a government initiative designed to stimulate innovation and support businesses in the UK. They provide tax relief to companies that invest in qualifying R&D activities by reducing their corporation tax liability or providing cash payments. 

The Two Schemes: SME and RDEC: The R&D tax credits scheme in the UK operates under two main categories:  

1. SME Scheme: This scheme is primarily aimed at small and medium-sized enterprises (SMEs) with fewer than 500 employees. It offers higher rates of relief for qualifying R&D expenditure.  
2. RDEC Scheme: The RDEC scheme targets larger companies or SMEs that meet other conditions. It provides a less favourable rate of relief for eligible R&D expenditure.
   

SME Scheme 

Eligibility Criteria 

To benefit from the SME scheme, companies must meet specific eligibility criteria, including:  

1. Being a UK limited company subject to corporation tax. 
2. Be defined by employee number, turnover and assets as an SME per CIRD definitions. 
3. Conducting research and development (R&D) activities that seek to achieve scientific or technological advancements.  
4. Incurring qualifying R&D expenditure. 

Qualifying Expenditure 

Under the SME scheme, companies can claim R&D tax credits on various types of qualifying expenditure, such as:  

1. Staffing Costs: Wages, salaries, employer National Insurance contributions, and pension fund contributions of employees directly involved in R&D activities.  
2. Consumable Materials: Costs of materials and utilities used in R&D projects.  
3. Subcontracted R&D: Expenditure paid to external parties providing R&D services.  
4. Software: Costs related to software used in R&D projects.

Calculating the Tax Credit

The SME scheme offers a more generous tax credit than the RDEC scheme. Companies can claim an enhanced deduction of 230% of qualifying R&D expenditure. This means that for every £100 of eligible expenditure, the company can deduct £230 from its taxable profits, reducing its tax liability. This is dependent on the trading profit of the company in that period. 

Surrendering Losses: 

If a company is making a loss, it can surrender the enhanced deduction for a cash payment. The payable tax credit is calculated at a rate of 14.5% of the surrenderable loss, providing a valuable cash boost to SMEs. 

RDEC Scheme  

Eligibility Criteria 

The RDEC scheme is aimed at larger companies, per CIRD definitions, or SMEs that have had their R&D subsidised by a Large Company or Grant. The eligibility criteria for the RDEC scheme include: 

1. Being a UK limited company subject to corporation tax.  
2. Conducting R&D activities that seek to achieve scientific or technological advancements. 
3. Not being an SME or being an SME that has subsidised R&D. 

Qualifying Expenditure 

Under the RDEC scheme, eligible expenditure includes: 

1. Staffing Costs: Wages, salaries, employer National Insurance contributions, and pension fund contributions of employees directly involved in R&D activities.  
2. Consumable Materials: Costs of materials and utilities used in R&D projects.  
3. Subcontracted R&D: Expenditure paid to specialist external parties providing R&D services. This specialist list of subcontractors is very small, e.g. universities, charities… 
4. Software: Costs related to software used in R&D projects. 

Calculating the Tax Credit 

The RDEC scheme offers a fixed rate of relief on qualifying R&D expenditure. Currently, the rate is set at 13% of eligible expenditures, but will be changing soon. This credit is taxable and contributes to reducing the company’s corporation tax liability. 

Maximising R&D Tax Credits  

Thorough Documentation 

Maintaining comprehensive records and documentation is crucial when claiming R&D tax credits. This includes project descriptions, technical reports, timesheets, and financial records. Accurate documentation helps support your claim and provides evidence to HM Revenue & Customs (HMRC). 

Expert Guidance 

Navigating the complexities of R&D tax credits can be challenging. Seeking the assistance of R&D tax specialists, such as TBAT Innovation, can ensure that you maximise your eligible claims and comply with HMRC regulations. These specialists can help identify qualifying R&D activities, categorise expenditure accurately, and guide you through the claim process. 

Conclusion 

R&D tax credits present an exceptional opportunity for companies engaged in innovation to reduce their tax liabilities and fuel further research and development. The SME scheme and the RDEC scheme offer different avenues for claiming tax relief, catering to the diverse needs of businesses across the UK. By understanding the eligibility criteria, identifying qualifying expenditure, and leveraging expert advice, companies can unlock the full potential of R&D tax credits. Embrace this valuable incentive, unleash your innovative potential, and contribute to the growth and success of your business.