R&D tax credits were introduced to incentivise ambitious, growing companies to invest in innovation and drive improvements to a raft of business sectors in the UK. The UK government has even committed to spending a further £2 billion a year by the turn of the next decade on increased R&D tax relief.
However, recent industry analysis shows that less than one-in-20 (3%) of eligible businesses are claiming the R&D tax relief they are entitled to.
How to find out if you’re eligible to claim R&D tax credits
The HM Revenue and Customs (HMRC) iterates that R&D tax relief is not restricted to any particular industry and isn’t just for businesses that spend time wearing lab coats. HMRC defines eligible R&D activity as being a project or activity designed to generate a breakthrough in some form of scientific or technological product or process.
Qualifying R&D projects must tick each of the following boxes:
- Strive for an advance in at least one aspect of science and technology
- Had to overcome an element of uncertainty
- Attempted to overcome this uncertainty (successfully or otherwise)
- Lead a project that couldn’t be easily copied or worked out by a fellow industry professional
How to claim R&D tax credits: the two types of R&D tax relief available
Small and medium-sized enterprises (SME) R&D Relief
SME R&D relief is available to businesses with fewer than 500 employees and a turnover of less than €100m or a balance sheet total below €86m. SME R&D relief allows firms to deduct an additional 130% of their qualifying costs from yearly profits, as well as the normal 100% deduction, thus resulting in a 230% deduction overall. Loss-making companies can even claim up to 14.5% relief of the surrenderable loss.
Research and Development Expenditure Credit (RDEC)
RDEC is the replacement of the previous Large Company R&D scheme offered by the UK government. RDEC can be claimed by companies with more than 500 employees. It can also be claimed by SMEs and large companies that are subcontracted to undertake R&D work by another large company. RDEC allows firms to claim 11% tax credits of their qualifying R&D expenditure.
How to claim R&D tax credits
One of the biggest deterrents from businesses claiming R&D tax credits is the hundreds of pages of time-consuming guidance from HMRC. There’s also a risk of businesses filing their claims incorrectly, claiming for too much or not enough tax relief, resulting in unwanted investigations into their financial affairs by HMRC. If you work with an adviser, this article will help you find the right R&D partner.