R&D tax credits explained

  • Research and development (R&D) tax credits are a valuable government tax relief that rewards UK companies for investing in innovation.
  • Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for a cash payment or corporation tax reduction.
  • R&D tax credit rates are equivalent to up to 33p for every £1 of qualifying expenditure.
R & D tax credits explained

If eligible, you can typically claim R&D tax credits for your last two completed accounting periods.

They are calculated based on your R&D spend. Qualifying expenditure is identified and enhanced by the relevant rate (see below) to produce your ‘enhanced expenditure’. When deducted from your taxable profits, or added to your loss, this will give you a corporation tax reduction if you were profitable, a cash credit if you were loss-making, or a combination of the two.

SMEs

Calculating R&D Tax Credits for SMEs

Fewer than 500 staff and either less than €100 million turnover or €86 million gross assets.

  • Most companies, including start-ups, fall into this category and can claim back up to 33p for every pound spent on R&D - even if their business is unprofitable.
  • The average claim made by SMEs in the UK is £54,214 (2014-15).
  • R&D tax credit claims are made through the government's SME R&D tax credit scheme, although there are a few exceptions outlined below.

Profit-making SME

If you spend £200,000 on qualifying R&D
you could receive up to £52,000 as a tax refund or reduced tax liability.

To reward businesses for their investment, the government allows you to enhance your qualifying expenditure.

Multiply your spend by 130% = £260,000

Then deduct this amount from your taxable profits, which, at a tax rate of 20% reduces your tax liability by £52,000

Loss-making SME

If you spend £200,000 on qualifying R&D
you could receive up to £66,700 as an R&D tax credit.

To reward businesses for their investment the government allows you to enhance your qualifying expenditure.

Multiply your spend by 130% = £260,000

Then add that to your original spend = £460,000

Then multiply the lower of your enhanced expenditure and your tax loss by the SME credit rate of 14.5% = £66,700

Large companies

Calculating R&D Tax Credits for Large Companies

Greater than 500 staff and either more than €100 million turnover or €86 million gross assets.

  • The average claim made by large companies in the UK is £349,540 (2014-15).
  • Large companies can claim back up to 8.8p for every pound spent on R&D - even if they are loss-making.
  • Tax credit claims for large organisations are made through the government's R&D expenditure credit (RDEC) scheme.

Large companies

If you spend £1,000,000 on qualifying R&D
you can claim back up to £88,000 of corporation tax

Multiply your spend by the RDEC credit rate (11%) = £110,000

Then deduct corporation tax from the gross credit (20%) = £88,000

Accountants, advisers and partners

Managing R&D Tax Credits for Accountants & Advisers

  • Starting to claim R&D tax credits, or improving recent claims can provide a transformative funding source to your clients.
  • We add value to your relationships by reducing your risk and freeing up your time.
  • We share a proportion of our fees with you.

Read our case studies

Who is eligible?

What counts as R&D?

Whatever its 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 means you might be:

  • Creating new products, processes or services
  • Changing or modifying an existing product, process or service

R&D doesn’t have to have been successful to qualify, and you can include work undertaken for a client as well as your own projects.

What R&D costs can I claim for?

When putting together an R&D tax credit claim, we look for the following types of qualifying R&D expenditure:

  • Expenditure on staff including salaries, employer’s NIC and pension contributions.
  • Expenditure on subcontractors and freelancers.
  • Expenditure on materials and consumables including heat, light and power that are used up or transformed by the R&D process.
  • Expenditure on some types of software.

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0117 926 9022

Other factors that could affect an SME claim

Receiving a grant or subsidy relating to your R&D project will usually mean some or all of your claim will be processed through the RDEC scheme normally reserved for large companies. The exact treatment of the R&D tax credit calculation will depend on the nature of the grant or subsidy. Our tax team can advise you on the correct treatment for your specific situation.

Undertaking R&D which has been contracted to you by another entity can have a significant impact on your R&D claims. If the R&D is on behalf of a large company, your R&D tax credit claim will normally be processed under the RDEC scheme for large companies. If it is for an SME, you may not be able to make a claim for that expenditure. Defining the nature of the subcontractor relationship in this instance can be complex. As chartered tax advisers, the ForrestBrown team can steer your claim along the correct path.

There are technical definitions to ascertain whether you are linked or partnered with other enterprises: for instance, if 25% of the share capital or voting rights are held by another entity. If applicable, when considering the standard SME definition above, a company must look at the aggregated amount for each of the qualifying criteria (i.e. employees, turnover and gross assets) on either an absolute basis (for linked enterprises) or on a proportioned basis (for partner enterprises).

When taken into account and your overall size is judged, you may be tipped into the RDEC scheme for large companies. Our chartered tax advisers take the utmost care to ensure that your R&D tax credit claim is prepared correctly, as determining the correct treatment is not always as obvious as it might seem.

If some of your business is abroad, it will not automatically rule out receiving R&D tax credits under the UK scheme. We recommend that one of our tax advisers reviews your business to understand how it is structured and where the R&D activities take place (both within your corporate entity and geographically) and where expenditure was incurred. Our team has an expert understanding of the tax landscape and will ensure you apply the correct tax rules in these circumstances. Read more...