R&D Tax Credits Guide


A guide to Research and Development tax relief and R&D tax credits.  What are they, how do they work and who is eligible.

What are R&D tax credits?

R&D tax credits or ‘Research and Development (R&D) Relief for Corporation Tax’ to use the full name, is run and administered by HMRC.  It is designed to encourage investment in R&D and new product development and currently provides around £1 billion in tax relief to companies each year.  The scheme was set up in 2000 and is a vital Government incentive in supporting businesses and helping the UK economy to grow through innovation and development.

The scheme has improved significantly since its inception, with the rate of relief increasing consistently and restrictions being relaxed, extending the benefits to more companies.

OUR SERVICE AT A GLANCE:

  • Fully managed service
  • 100% success rate
  • Payment only when you see the benefit
  • No set-up fees or expenses charged
  • No long-term tie-ins
  • Team with industrial experience and expertise

 

How does it work?

Put simply the scheme enhances your development costs, reducing the profits you declare and therefore the amount of Corporation Tax you pay.  So the value to you of the scheme is in the tax saving you make.  You’re able to claim for the last two financial years and so if you haven’t made a claim before you should be able to get a cash refund for those years.  The scheme also benefits loss-making companies with either increased future tax savings or a payable tax credit.

Once you’ve made your initial claim you can also keep using the scheme every year (as long as your doing eligible work) to reduce your tax liability going forward.

We've helped companies from a wide range of sectors, including software, electronics and agriculture.  If you'd like to discuss our experience in your industry, just get in touch.

We've helped companies from a wide range of sectors, including software, electronics and agriculture.  If you'd like to discuss our experience in your industry, just get in touch.

How much is it worth?

There are two versions of the scheme; the first covers SMEs (Small and Medium Sized Enterprises) and the second is for Large Enterprises (LEs).  

For the purposes of R&D tax relief, an SME is defined as a company with fewer than 500 people, turnover less than €100m and a balance sheet of less than €86m.  LEs are companies where any one of these levels is exceeded.  

The SME rate is currently 230% of eligible costs and for LEs it's 11% of their R&D expenditure under the Research & Development Expenditure Credit (RDEC) scheme.

As a simplified example; If an SME had a full time development engineer working exclusively on R&D and paid them £30,000 per year, they would use the scheme to effectively record his cost at £69,000 (230% x £30,000), meaning they’d declare £39,000 less profit, and wouldn’t pay Corporation Tax on that £39,000, saving them £7,800 (26% of the incurred cost).

You can see from this calculation that the return is attractive, and becomes increasingly so the more work you undertake and the more people you employ.  

Our clients have benefited from average repayments of £45,000 with many receiving refunds in the hundreds of thousands of pounds. As a rough guide profitable companies receive 26% of their eligible development costs back , but this can vary depending on size of the company, when the expenditure was incurred and the level of its profit or loss.

Can any company benefit?

Any limited company, from any industry, whether profitable or loss making can benefit, as long as it is doing eligible work such as developing new products, technology, processes or services. Unfortunately Limited Liability Partnerships (LLPs) and charities cannot take advantage, though “not-for-profit” companies may be able to, depending on how their finances are structured.

Despite the huge benefits provided by the scheme it is estimated that only 5% - 15% of eligible companies are actually claiming.  There are many reasons for this, but the most common ones that we encounter are where companies don’t realise they’re eligible considering their development work to be “just part of the job”.

Sometimes companies are advised by their accountants that they don’t qualify when they are indeed doing eligible work. This is an understandable mistake, as accountants expertise is financial rather than in understanding either the R&D tax legislation or the technology involved. The expertise and experience of our team means we can identify all the qualifying expenditure and because we specialise in R&D tax relief we are able to work comfortably alongside your existing accountancy arrangements. 

In addition we have several formal partnerships with accountancy firms, where they use us to provide an outsourced professional R&D tax relief service to a number of their clients.

 

Which costs are eligible for R&D tax credits?

HMRC's define a qualifying project as one which "seeks to achieve and advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty".

This may sound daunting, but it’s broader definition than you might think. Companies overcoming technical problems, improving existing products, or combining existing components into new systems can all be conducting eligible work. This includes making something more efficient, adding more functionality, scaling it up, reducing its cost or its environmental impact.  It is also not necessary for work to have been successful, so long as the aim would have been to achieve an advance.  R&D is by its very nature risky and doesn’t always succeed, so the effort taken trying to achieve can be included.

The costs that can be used include staff costs (gross employment costs), consumables such as materials and equipment, overheads such as heat, light and power, and finally subcontracted support, although this is claimed at a lower rate.

 

Is our Intellectual Property protected?

Yes. HMRC will not share information about any project and will only use information provided to assess the validity of a claim, and we use confidentiality agreements with all of our clients.

 

How do we make a claim?

Call us!  We've developed a process that takes the minimum of your time and is fully supported by HMRC.  Our team of industrial experts and tax advisors have a 100% success rate and work on a payment on results basis, with absolutely no setup fees or expenses charged.  If you want to discuss in confidence and with no obligation, we'll happily talk you through the scheme and your eligibility with no pressure.

 

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0115 824 0402