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 invest in accelerating their R&D, hiring new staff and ultimately growing.
How do R&D tax credits work?
Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
Is my business eligible for R&D tax credits?
To benefit from R&D tax incentives, you must:
- Be a limited company in the UK that is subject to Corporation Tax.
- Have carried out qualifying research and development activities.
- Have spent money on these projects.
What counts as R&D?
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. This could include:
If you’re not sure if your project is possible, or you don’t know how to achieve it in practice, you could be resolving technological uncertainties and be carrying out qualifying R&D.
Within the government’s accepted research and development definition, R&D doesn’t have to have been successful to qualify. Further detail is available in our KnowledgeBank article: How do I know if I’m carrying out qualifying R&D?
What costs qualify for R&D tax credits?
- Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
- Subcontractors and freelancers. Materials and consumables including heat, light and power that are used up or transformed by the R&D process.
- Some types of software.
- Payments to the subjects of clinical trials.
Read our article for more on what qualifies for R&D tax credits >
What R&D tax credit incentive is right for my business?
What incentive you use to make an R&D tax credit claim will largely depend on whether you are an SME or a large company.
Fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.
500 staff or more and either more than €100 million turnover or €86 million gross assets.
|Who are you?||SME R&D tax credit incentive||RDEC|
|SME||Yes||Yes – sometimes|
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax incentive. And if you are a large company, via the Research and Development Expenditure Credit (RDEC).
However, there are a few factors such as grants and subcontracting that can restrict an SME from accessing the SME incentive. This means you may need to make a claim via RDEC – or via both incentives.
We help SMEs across all sectors receive millions of pounds every month to re-invest back into their businesses. It is possible to make use of R&D tax credits and grant funding together by using both incentives to ensure maximum value. ForrestBrown also offer a range of services for large companies, including RDEC claim preparation.
Find out more about ForrestBrown’s R&D tax credit claim process
Our team of chartered tax advisers save you time by preparing a robust R&D tax credit claim that uncovers all of your qualifying R&D activity and costs.
How much is an R&D tax credit claim worth?
R&D tax credits are calculated based on your R&D spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate (see below). This produces your ‘enhanced expenditure’.
When you deduct your enhanced expenditure from your taxable profits, or add it to your loss, it will result in:
- a Corporation Tax reduction if you are profit-making.
- a cash credit if you are loss-making.
- or a combination of the two.
R&D tax credit rates
Loss-making SMEs are able to claim up to 18.6p for every £1 spent on qualifying R&D activities.
Loss-making R&D intensive (defined as companies who spend at least 40% of their total expenditure on qualifying R&D) are able to claim up to 27p for every £1 spent on qualifying R&D activities.
Profit-making SMEs are able to claim up to 21.5p for every £1 spent on qualifying R&D activities.
The average claim made by SMEs in the UK is £53,663 (2020-21).
Large companies are able to claim 20p for every £1 spent on qualifying R&D activities.
The average large company (RDEC) claim in the UK is £225,298 (2020-21).
The R&D tax credit rates are shown in the table opposite.
|Rates by incentive:|
|Who are you?||SME R&D tax credit incentive||RDEC|
|A loss-making SME||Up to 18.6%||20%|
|A loss-making R&D intensive SME||Up to 27%||20%|
|A profit-making SME||Up to 21.5%||20%|
The benefits of R&D tax credits
As a form of innovation funding, R&D tax credits can transform your business. At ForrestBrown, we are passionate about helping innovative companies realise the full potential of R&D tax incentives so that they can grow. This is because the benefits are wide-reaching.
The government benefits from increased productivity which is good news for UK businesses, and good news for the economy. It can also lead to innovation that can effect positive change on a global scale.
Adding value to your business
We use a rigorous, continually-improving process to deliver R&D tax credit claims that deliver maximum value and stand up to HMRC scrutiny. We’d love to find out more about your business and discuss how we might be able to help.