The government’s R&D tax-credit legislation is purposefully broad in order to capture innovation in all sectors. Today’s article looks at why R&D Tax Credits are the key to funding your innovation, no matter your industry or sector.
If you have undertaken work (either in-house or for a client) which involves creating new products, processes, knowledge, or services (or developing existing ones) then you may be eligible to claim R&D tax credits.
The generous relief that R&D incentives provide supports all risk-taking companies whose work uses science or technology in order to overcome a limitation or problem. And, what’s more: you can still claim the credits even if your project was ultimately unsuccessful.
What type of work is eligible R&D?
To qualify for R&D relief, your project must be seeking to make an advance in a particular field of science or technology. This doesn’t necessarily mean you need to be re-inventing the wheel, but you should be able to demonstrate that you faced scientific/technological obstacles, limitations and uncertainty that could not be easily resolved. Remember: R&D can be improving existing products, processes, and services (or building on existing knowledge); your work needn’t necessarily have developed a solution from scratch.
Your R&D work must involve a scientific or technological development in your particular field of expertise – work in the arts or social sciences, or purely theoretical mathematical work is not eligible (except where the work also involves scientific and/or technological development being sought).
HMRC’s definition of an ‘advance’ in science or technology (for R&D tax purposes) incorporates an awareness that existing knowledge and comparable solutions will be able to help you in your development work. It is the efforts (and associated costs) in going beyond this existing baseline level of knowledge and capability in your field of science/technology that the R&D claim aims to encapsulate.
As part of your R&D claim, you should be able to demonstrate:
- The advance in science or technology that you were seeking (this includes a description of the knowledge/capabilities that already existed to help in your solution).
- A description of the process and activities you undertook in attempting to create a solution.
Defining an “Advance in the Field”
Your advance in science or technology cannot be the resolution of a purely commercial or logistical problem – though these difficulties may well be part of an eligible advance involving science or technology. Instead, you should focus on describing the scientific or technological limitations and obstacles that governed your projects and their aims. Whether your R&D work is for your own benefit or for a client, you should be able to demonstrate that you could not easily gain the knowledge/capabilities/solutions from elsewhere in the market or public domain.
Even if comparable solutions exist elsewhere in your sector but the details of how those solutions have been achieved are not readily available or guessable then your advance can qualify. Your advance could therefore seek comparable performance characteristics or capabilities of existing solutions but do so in a fundamentally different way (e.g. more cost-effective, faster, more efficient). This is known as ‘an appreciable improvement’.
Proving that a competent professional (someone with relevant expertise and skills in your field) could not easily solve the problem that your advance seeks to address helps illustrate the inherent difficulties and uncertainties involved.
Your Advance: trying to overcome the uncertainty
In order to properly demonstrate an ‘advance in science or technology’ it’s a good idea to describe the research, testing, analysis, and development around existing products/processes that was/were variously required to achieve your aims.
Each company will have a radically different approach to problem-solving and supporting methodologies. Describing how far existing knowledge and products could be used to achieve your aims also helps show how you went beyond this level in seeking your advance. These descriptions of your work can (and should) include mapping out your project’s failures and changes, as well its milestones and successes.
Types of R&D credit
The types of credit you can apply for depending on both the size of your business and whether the project has been subcontracted to you.
- SME (Small and Medium-sized Enterprises) R&D Relief
- R&D Expenditure Credit
SME R&D Relief:
You can claim SME R&D Relief if you’re an SME with fewer than 500 staff and a turnover of under 100 million euros (or balance sheet totalling under 86 million euros). You may have to factor in linked companies and partnerships when working out if you’re an SME.
SME R&D Relief will allow you to claim a tax credit if the company is making a loss (worth up to 14.5% of the surrenderable loss), and allows you to deduct a further 130% of qualifying costs from your yearly profit, as well as the normal 100% deduction (totalling a 230% deduction).
R&D Expenditure Credit (RDEC):
This replaces the former relief available under the large company scheme. Large firms can claim R&D Expenditure Credit for working on R&D projects, but this credit can also be claimed by SMEs (and large companies) who have been contracted to do the R&D work by another big company.
RDEC is a tax credit. Before December 2017 it amounted to 11% of your qualifying R&D expenditure but was increased to 13% from April 2020.
These two routes illustrate the potential for financial reward when going into the R&D field. Finding a solution for an industry problem could then be both practical for your business, and entirely manageable financially due to government help.