R&D Tax Credit Defined

Rewarding innovation and fueling progress, the R&D tax credit has the power to change your business.

What are R&D tax credits?

The research and development (R&D) tax credit is a government incentive intended to reward UK companies for contributing to innovation. It is a priceless source of money for businesses to invest in accelerating their R&D, hiring new staff, and eventually growing.

How do R&D tax credits work?

Companies that expend money developing new products, processes, or services or enhancing existing ones are qualified for R&D tax relief. If you’re spending money on your innovation, you can formulate an R&D tax credit claim to collect either a cash payment and/or a corporation tax reduction. The scope for classifying R&D is huge; in fact, it exists in every single sector. And if you’re making a claim initially, you can usually claim R&D tax relief for your previous two completed accounting times.

Is my business eligible for R&D tax credits?

To gain from R&D tax incentives, you must:

1. Be a limited company in the UK that is governed by corporation tax.
2. Have carried out valid research and development activities.
3. Have used up money on these projects.

Who qualifies for R&D tax credits?

R&D can happen in any sector. Thus, it arises in everything from cheese-making to chemical engineering, manufacturing, and construction to renewable energy.

What counts as R&D?

The government’s R&D guidelines are decisively broad. Whatever size or division, if your company is taking a risk by striving to resolve scientific or technological uncertainties’ then you may be carrying out qualifying action. This could include:

1. Crafting new products, processes, or services.
2. Adjusting or modifying an existing product, process, or service.

If you’re not certain if your plan is possible or if you don’t discern how to attain it in practice, you could be resolving technological uncertainties and carrying out qualifying R&D. Thus, inside the government’s acknowledged research and development meaning, R&D doesn’t have to have been triumphant to qualify.

What costs qualify for R&D tax credits?

1. Employees, including salaries, employer’s NIC, pension donations, and compensated expenses
2. Subcontractors and freelance workers
3. Resources and consumables, including heat, light, and power, that are consumed or transformed by the R&D process.
4. A number of types of software.
5. Spending on the subjects of clinical trials.

What R&D tax credit incentive is right for my business?

What incentive you use to make an R&D tax credit claim will mainly depend on whether you are an SME or a big company.

SME:

Less than 500 employees and either not more than £100 million turnover or £86 million gross assets. Most businesses, including start-ups, fall into this category.

Big company:

500 personnel or more and either more than £100 million turnover or £86 million gross assets.

If you are classified as an SME for R&D tax credit purposes, your next step will be to create a claim via the SME R&D tax incentive. And so, if you are a big company, via the Research and Development Expenditure Credit (RDEC).

Though there are a few reasons, such as grants and subcontracting, that can limit an SME from accessing the SME incentive. Then, this means you may have to make a claim via RDEC or via both incentives.

We assist SMEs across all areas in obtaining millions of pounds every month to re-invest back into their businesses. As a result, it is probable to make use of R&D tax credits and grant funding together by using both incentives to guarantee maximum value.

How much is an R&D tax credit claim worth?

R&D tax credits are calculated based on your R&D expenditure. So, to make an R&D credit computation, you need to classify qualifying expenditures and develop them at a significant rate. This creates your ‘enhanced expenditure’.

When you subtract your enhanced expenditure from your taxable profits or include it in your loss, it will effect:

1. a corporation tax reduction if you are revenue-generating.
2. a cash credit if you are loss-making.
3. or a combination of the two.

R&D tax credit charge

1. Loss-making SMEs are capable of claiming up to 18.6p for every £1 spent on eligible R&D activities.
2. Loss-making R&D-intensive (defined as companies that spend at least 40% of their total expenditure on suitable R&D) are able to claim up to 27p for every £1 spent on appropriate R&D activities.
3. Profit-making SMEs are capable of claiming up to 21.5p for every £1 spent on qualified R&D activities.
4. The common claim made by SMEs in the UK is £53,663 (2020–21).
5. Big companies are suitable to claim 20p for every £1 spent on qualifying R&D activities.
6. The average large company (RDEC) claim in the UK is £225,298 (2020–21).

Updates to R&D tax relief from April 1, 2024

• SME R&D tax support and the Research and Development Expenditure Credit (RDEC) will be compounded for accounting periods starting on or after April 1, 2024, though an enhanced rate for R&D-intensive SMEs (introduced on April 1, 2023) will carry on to be accessible under the current SME model.

• The combined scheme will move to a sole rate and set of eligible rules that include elements from the active two schemes, including an explanation of the approach to subcontracting out and subsidising R&D. At the same time, the threshold for R&D intensity will drop from 40% to 30%, making more businesses qualified for the improved rate.

•  Limits on abroad R&D expenditure will also come into force on April 1, 2024, meaning there is ample to consider when preparing for future investment in innovation. Low Cost’s professional team is on hand to assist businesses comprehend what these changes will mean and what they can do now to plan.

The benefits of R&D tax credits

As a form of innovation financing, R&D tax credits can change your business. At Low Cost Accounts, we are fervent about serving innovative companies realise the full performance of R&D tax incentives so that they can develop. This is because the benefits are extensive.

The government benefits from amplified productivity, which is excellent news for UK businesses and good news for the financial system. It can also direct to innovation, which can result in positive change on a worldwide scale.