R&D Tax Credits Explained
Supporting businesses that are taking commercial risks to advance industry knowledge, products, processes and services.
What Are R&D Tax Credits?
£6.6 Billion
R&D relief awarded to UK businesses in 2020-21.
R&D tax credits are a UK government incentive aimed to support innovation within limited companies.
It enables businesses to deduct up to an additional 86% off a qualifying R&D projects spend. (Please note, for according periods starting on or after 1st April 2024 a new merged R&D tax credit scheme will come into effect and offer an additional tax credit gross benefit of 20% or R&D Intensive companies could receive an enhanced rate of tax relief of £27 for every £100 of qualifying R&D spend.)
However, to qualify, the innovative project must attempt to overcome a scientific or technological uncertainty within a particular field.
How Do R&D Tax Credits Work?
To qualify, an R&D project must attempt to overcome “scientific or technological uncertainties”.
Simply put, this is when a business sees a gap within the market and they decide to commit financially and with the time of a qualified professional to embark on a process of investigative testing, all in the hopes of solving an unknown solution.
This testing phase is what qualifies; therefore, a failed or successful solution can still claim, as long as it extends the knowledge within their field.
The R&D Project Must Be Attempting To:
Check Your Eligibility for R&D Tax Credits
To qualify for the R&D support, a business must fulfil the following criteria:
- Incorporated company of any sector.
- Attempted to create a new or enhance an existing product, service or process.
- Attempted to advance the field’s overall knowledge with the qualifying project.
- A qualified, competent professional could not have readily solved the uncertainty at the outset of the project.
- Committed financial resources to complete an innovation project that involved research, testing and analysis.
Qualifying Research and Development Activities
R&D tax credits support innovation projects from the start to the end of the scientific and technological uncertainty. Below is an example of where, in a product’s life-cycle, qualifying R&D activity can occur.
Non-Qualifying
Commercial/Scientific Idea
Market/Feasibility Research
Qualifying R&D
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
Non-Qualifying
Patents or other IP protection sought
Pre-production design
Industrial upscaling
Qualifying R&D
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
5 Qualifying R&D Tax Credit Costs
There are five pillars of qualifying R&D costs you can claim for within the “uncertainty” phase of an innovation project.
1. Staff & EPW Costs
Under the R&D tax credit incentive, you can claim the following costs for staff or externally paid workers (EPWs) who were directly involved in an R&D project (they had “hands on” input), and some managerial time:
Salaries
Wages
NICs contributions
Pension contributions
2. Subcontractor Costs
You can claim for 65% of unconnected subcontractors and freelancer costs under the SME scheme. The rules are more complex for connected subcontractors.
The RDEC scheme is restricted to R&D project payments made to individuals, a partnership of individuals or a qualifying organisation, such as a charity, higher education institute, scientific research organisation or health service body.
Currently, the subcontractor doesn’t have to be a UK resident, but new regulations are scheduled for April 2024 to refocus on UK innovation.
3. Consumable Costs
Materials and hardware that are directly consumed during the R&D project.
This includes chemicals, ingredients and electrical components.
These materials and their outputs must not be commercially viable.
4. Utility Costs
Power, water and fuel that are directly used in an R&D project.
Calculating the proportion of utility costs used in an R&D project can be difficult, but the Amplifi team can advise you on the best practices.
5. Software, Data & Cloud Computing Costs
Software expenditure that was directly involved in the R&D project. You can also claim for a proportion of software that was only partly used in innovation activities.
For financial years beginning on or after 1st April 2023, you will be able to claim for Data & Cloud Computing Costs directly involved with the R&D project that fall into the following categories:
Data storage
Hardware facilities
Operating systems
Software platforms
Purchase costs of data sets
Guide To The R&D Tax Credit Schemes?
Any incorporated business in any sector is eligible. As long as they are trying to “resolve scientific or technological uncertainties”. Please note that for accounting periods commencing 1 April 2024 a new merged R&D tax credit scheme will come into effect.
SME and R&D Tax Credits
Under the incentive, SMEs are defined as companies with:
- Less than 500 employees
- Turnover less than €100m or balance sheet total less than €86m
- The project has not received any other notified state aid (if it has, that project will have to claim under the RDEC scheme)
For these SMEs, R&D tax credits offer an additional tax deduction of up to 130% off qualifying R&D project spend.
However, qualifying R&D expenditure incurred on or after the 1st April 2023, will receive a new gross tax credit rate of 86%.
Large Business R&D Tax Credits (RDEC)
Under the incentive, RDEC large companies are defined as limited companies with:
Primarily
- More than 500 employees
- or with a turnover of more than €100m or a balance sheet total of more than €86m
Sometimes
- An SME with a proportion or all of the innovation spend that has already been supported by particular grants (something which is restricted on the SME scheme)
The Research and development tax credit incentive offers large businesses support in the form of an additional tax credit gross benefit of 13% on qualifying R&D spend.
However, qualifying R&D expenditure incurred on or after the 1st April 2023, will receive a new gross tax credit rate of 20%.