What is the purpose of R&D tax credits?

3 min read

In 2000, the UK government launched the research and development tax relief incentive, also known as R&D tax credits. The aim is to encourage growth by rewarding risk-taking companies of any size, from any sector, who invest in innovation.

This article will look at how the initiative works, why it was introduced, and how it can benefit businesses of all sizes and sectors.

How does R&D tax relief work?

The initiative aims to encourage scientific and technological innovation by rewarding businesses that invest in the development of new or existing products, processes, materials, processes, services or devices. Developing new knowledge in a particular field of science or technology is also eligible. You don’t have to be in a lab or reinventing the wheel – improving what already exists is often how many R&D projects begin. What matters is that you have demonstrably sought to overcome ‘scientific or technological uncertainty’; and you needn’t have been ultimately successful. The idea is that any applicable projects have gone beyond the existing level of readily available or deducible scientific/technological knowledge of capability. Your innovation may have comparable precedents, but you have developed your own solution. You may have improved what already existed.

A business can claim R&D tax relief in the form of corporate tax reductions or direct cash payments if its innovation project fits the government’s definition of research and development (R&D). It should be noted that this definition is not the same as the one used in commercial, engineering and accounting contexts.

The following is taken from HMRC’s ‘simple guide’:

“To qualify the company must be carrying out research and development work in the field of science or technology. The relief is not just for ‘white coat’ scientific research but also for ‘brown coat’ development work in design and engineering that involves overcoming difficult technological problems. This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way. But pure product development in itself does not qualify.”

Why does the government incentivise R&D?

Innovation is vital to the UK economy. Not only does it drive productivity, but it also grows markets and helps to create jobs and wealth.

According to the World Intellectual Property Organization’s (WIPO) Global Innovation Index 2021, the UK is the fourth most innovative economy in the world and the third most innovative in Europe.

Despite this high ranking, most of the country’s researchers are employed in government and the higher education sector – not in privately owned businesses.

R&D tax relief helps to ensure that UK limited companies of all sizes and in all industries have opportunities and the financial flexibility to be creative, solve problems that extend beyond their own walls and contribute to national prosperity. And the incentives are continuing to evolve to best support the state of innovation in the UK.

How does R&D tax relief benefit businesses?

The aim of R&D, in general, is to help businesses remain competitive, within the UK market and globally.

Through thorough research into market and customer needs and problems, and then creating valuable solutions using newly acquired knowledge, companies stay relevant in their industries and increase profit.

But R&D takes resources that some businesses, especially small ones, don’t have or can’t justify investing. By being able to claim as much as 33p for every £1 of qualifying R&D expenditure (or 11p for large companies), businesses gain easier access to projects that could allow them to grow.

The cash boost gained from a successful R&D tax relief claim can be reinvested to fuel other innovation projects or used to support growth in other ways, such as hiring new talent or rewarding staff for creativity. There are no stipulations on how the money can be used.