What are R&D tax credits?

Jan 28, 2022

From being a once relatively obscure government incentive, research and development (R&D) tax credits have exploded in popularity in the UK as their scope and generosity has been extended.

They are designed to encourage innovation and drive economic growth by providing an injection of cash or a corporation tax reduction when evidence of qualifying R&D is submitted to HMRC.

If you are new to the subject, the key thing to understand is that the definition of R&D is surprisingly broad. So read on to discover if you could benefit…

Who can benefit from R&D tax credits?

You need to be a UK limited company in order to benefit from R&D tax credits as the claim is made via the corporation tax return. Of course, you need to have actually performed some R&D (more on that in a moment) and spent money on your activity. This is because the value of the claim is based on the amount of money you have spent.

What is qualifying R&D activity?

Individual R&D activity is not defined specifically in the legislation. Instead, there is a sweeping definition that can be applied across any sector. In essence, you need to be taking a risk in resolving technological or scientific uncertainties. 

You could be creating new services, processes or products or changing/adapting ones which already exist. Crucially, you do not need to achieve success to qualify – after all, there needs to be risk involved.

The broadness means that limited companies in just about any sector could qualify – from agriculture to zoology.

That being said, it’s important to be absolutely clear on whether or not your activity qualifies, as HMRC are cracking down on false claims. If you’re not sure, it’s best to double check with your accountant.  

What counts as qualifying R&D expenditure?

As we have said, the amount you can claim is based on how much you spend. Only certain expenditure counts, but there is quite a lot you can include.

The main ones are staff costs like salaries and NI; freelancer or subcontractor costs; certain software; payments to people in clinical trials; and materials or consumables which are used up or transformed during your R&D. In his Autumn Budget 2021, Rishi Sunak announced that data and cloud computing costs would be added to the qualifying expenditure in the future. Watch this space.

How much are R&D tax credits worth and what are the benefits?

If your business is an SME you can claim up to 33p in the pound for qualifying expenditure if you are loss making and 25p in the pound if making a profit. The benefit to larger companies is 11p in the pound.

But let’s not talk in single pounds and pence – when you look at the average annual claim values for SMEs and large companies they are approximately £57K and £633K respectively. 

As you can imagine, this could make a huge difference to your fortunes – from hiring brilliant new staff to investing in the latest cutting-edge equipment. Generally, businesses that claim end up going on to innovate further.

What to watch out for

The biggest risk is probably missing out when you legitimately qualify. Not getting the cash injection you are entitled to will make you less competitive and hamper future growth and innovation.

Unfortunately, as the R&D tax credit scheme has grown in popularity, some businesses and their advisers have taken advantage of it, attempting to make false or inflated claims. To counter this HMRC have expanded their R&D tax credit team with 100 extra compliance officers to prevent such abuse. 

It is essential you use a reputable firm to prepare an R&D tax credit claim and accurately identify qualifying costs and activity.

If you would like to discuss this for your own business with our experts, please get in touch.