A Guide to R&D Tax Credits for Business
R&D tax credits is a government program that is available to limited companies in the UK, which means it is unavailable to companies that are partnerships or sole proprietors. In this guide, we explain more about the scheme, how you can apply and how it can benefit your business.
At FI Group we work with businesses, from startups and SMEs to larger corporation, to support them in claiming R&D tax credits for their innovative projects.
What are R&D tax credits and how do they work?
First introduced in 2000, R&D tax credits replaced the Scientific Research Allowance (SRA) scheme, which was a type of tax allowance for a company’s capital expenditure for items like research and scientific equipment. There are two types of R&D tax credit scheme, the Small and Medium-sized Enterprise Scheme (SME) and the Research and Development Expenditure Credit scheme (RDEC), which used to have the title of the Large Company Scheme.
R&D tax credits are applied to either a profit- or loss-making business to help lower the tax burden, and they can be taken either as a future tax offset or an immediate cash credit.
The SME scheme employs a formula that can allow a company to claim back as much as 33.5% of its spending on research and development, whereas the RDEC scheme works in a similar way but its rates are lower, with a company able to claim back approximately 9%.
What type of work is eligible for R&D tax credits?
The official government guide can be a little bit vague on this area, but the qualification criteria for claiming R&D tax credits covers many diverse activities in many different fields.
These include but are not limited to:
- ICT hardware development. This could be the development of up-to-the-minute firewall hardware for example.
- Software development. Maybe your company is designing and developing brand new virtual reality gaming software.
- Bioenergy. This could be the development of an experimental type of engine for motor vehicles that runs on biomass fuel for example.
- Cleaner Technology. This could include the development of appliances that are more energy efficient and environmentally friendly.
- Modern Construction Materials. For example, the development of a new type of eco-friendly roofing material.
- Health Sciences. An example of this would represent the increasingly urgent need for a COVID-19 vaccine.
What counts as an R&D cost?
As soon as you have figured out that the activities that your company carries out are eligible for R&D tax credits it is vital that you know exactly which expenses will be covered by a claim. However, it is vital to note that all expenditure must have taken place within the previous two financial years prior to making a claim.
Direct staff costs for R&D can be claimed, and this includes gross wages, pension scheme contributions, reimbursed business expenses and employer insurance contributions. However, it is important to note that these can only be claimed for employees engaged in R&D activities.
Agency workers and subcontractors also engaged in R&D work can also be claimed for but the R&D tax credits for these employees is typically restricted to 65 percent of the payments your company makes to the agency.
Any consumables used in the R&D process can also be claimed, and this covers materials and power consumption, but only for the resolving of problems relating to any R&D activity, not the materials, used in the finished product.
Prototypes, clinical trial volunteers and software used in R&D can also be claimed under certain circumstances, with prototypes that are sold as a product not qualifying for R&D tax credits.
What costs are not covered by R&D tax credits?
Although this can be a grey area, and it is a sound idea to get advice from a professional on which expenses can be claimed, the following are definitely not be eligible.
- The production of services and goods to be commercialised.
- Costs accrued in the process of patenting and trademarks as these inevitably occur after the completion of research and development.
- Capital expenditure. Although it may have been a shrewd idea to capitalise expenditure on R&D at the time, it is worth considering that these expenses will then not be eligible for R&D tax credits. Nevertheless, a further R&D allowance can be used to claim back any costs on assets that have depreciated in value due to their use on research and development projects.
How to claim R&D tax credits
There are three vital elements to the application. To begin with, you will need to fill in your company’s tax return form (CT600).
Subsequently, you will need to provide an explanation on how your research and development work meets the requirements for an R&D tax credit claim. This is typically referred to as the ‘Technical Narrative.’
Finally, you will need to provide your calculations that will explain how you arrived at the total amount you are claiming for.
Hopefully, this guide has given you all the information you need to make a decision on whether to claim R&D tax credits, but it is always a smart idea to seek advice from a professional tax advisor before making your final decision.