Research and development (R&D) tax credits are designed to reward and incentivise companies engaged in innovative projects. Although the system was first introduced over 20 years ago, R&D tax relief remains largely underclaimed – so is your business eligible without you realising it?
In this guide, we’ll explain the ins and outs of these credits and how to apply for them.
R&D tax credits – in short
R&D tax credits are the Government’s way of financially supporting companies that push the frontiers of innovation.
This scheme isn’t just for those making ground-breaking discoveries, but also for businesses taking on complex challenges to make advancements in their fields.
You can only claim R&D tax credits if you run a limited company, and your project must meet the R&D eligibility criteria — but more on that later.
Understanding the two R&D tax credit schemes
Recognising that companies of different sizes have varied needs and capacities for R&D, the Government has introduced two distinct R&D tax credit schemes:
The SME R&D scheme is tailored for small to medium-sized enterprises. To qualify for this scheme, companies must have:
- fewer than 500 employees, and
- either a turnover of €100 million or less; or a balance sheet total below €86 million.
Larger companies, meanwhile, will need to use the R&D expenditure credit (RDEC) scheme. You will be classed as an RDEC-qualifying company if you have:
- 500 employees or more, or
- a turnover of more than €100 million and a balance sheet total above €86 million.
How does it work?
Companies that invest in eligible R&D activities can claim tax credits to help offset some of their costs. If a company is profitable, these credits can significantly reduce its tax bill.
Loss-making companies, however, can receive a cash credit from the Government to support their continued innovation.
What are the current R&D tax credit rates?
SME R&D scheme
For accounting periods starting on or after 1 April 2023, profitable companies can use the SME scheme to claim tax relief of 86% on qualifying expenditures.
Loss-making companies can typically claim 10% of qualifying expenditures as a tax credit under this scheme — unless more than 40% of their total spending is classed as R&D expenditure, in which case this increases to 14.5%.
RDEC scheme
When using the RDEC scheme, both profitable and loss-making companies can claim an R&D tax credit worth up to 20% of their qualifying expenditure.
Eligibility criteria and qualifying expenditure for R&D
Your project must meet various criteria before you can claim any R&D tax credits. The rules surrounding R&D projects can be complicated, but it’s important to understand the basics.
Firstly, your project should aim to make an advance in an area of science or technology. This excludes any innovations you make in the humanities or social sciences such as psychology.
Secondly, genuine R&D projects wrestle with real challenges in your industry that have proven difficult to overcome. You’ll need to demonstrate that your project attempts to answer a technical uncertainty to qualify for R&D tax credits.
You’ll also need to consider other factors. Is the project undertaken by a competent professional? Does it benefit your industry as a whole? Familiarising yourself with what counts as an R&D project can boost your chances of making a successful claim.
In terms of expenditure, the following typically qualifies:
- Staffing costs: This includes employee salaries, staff expenses, and even overheads like employer NICs and pension contributions.
- Collaboration costs: If your R&D project involves a third-party expert, some of these costs can be claimed.
- Software & consumables: If specific software or materials are procured, especially for R&D, those costs will count as R&D expenditure.
- Prototyping: Developing prototypes is an essential phase in many R&D processes and therefore claimable. However, if the prototype is eventually sold off, that revenue should be deducted from the claim.
So, how do you get these credits?
Applying for R&D tax credits involves a lot of legwork.
As well as ensuring your projects and activities meet the criteria, you’ll need to keep detailed records of all your R&D expenditure. And before you can claim R&D tax credits on your corporation tax return, you’ll need to submit an additional information form to support your claim.
Calculating your R&D tax credits, meanwhile, can be complex and often requires expertise to get right. Thankfully, that’s what we’re here for.
Summary
R&D tax credits are all about encouraging innovation and giving businesses a financial boost along the way. If you think you’re eligible, it’s definitely worth exploring.
If the R&D claims process seems like a maze, there’s no harm in seeking guidance. As professional accountants, we can help you navigate the process and ensure your innovation is rewarded.
Get in touch to find out how we can help you get the most out of your R&D tax credit claim.