R&D tax relief is a great incentive for companies to invest in innovation. Knowing which costs qualify for an R&D tax credit can boost the benefits your business gets. In 2022/23, UK companies claimed £7.5 billion in R&D tax relief – so it’s big business.
What are R&D Tax Credits?
R&D tax credits are a government incentive to reward companies for investing in innovation. They’re a source of funding to help you accelerate your R&D, hire new staff and grow your business. Introduced in 2000 for SMEs and 2002 for large companies, R&D tax credits are a corporation tax relief. Companies that spend money developing new products, processes or services can claim these credits and reduce their corporation tax bill and support their innovation.
Eligibility Criteria
To be eligible for R&D tax credits, you must be a UK company working on innovative projects in science and technology. The key criteria is that you must be taking a risk by trying to solve scientific or technological uncertainty. Projects should be advancing technology in areas like IT, engineering or biotechnology. But projects in social sciences, arts, humanities or economics don’t qualify. You must meet specific accounting period requirements and incur qualifying costs to be eligible for the tax credits.
Qualifying R&D activities and scientific or technological uncertainty
To determine eligible costs you need to first identify qualifying R&D activities. According to HMRC, qualifying R&D projects must aim to achieve an advance in science or technology by resolving scientific or technological uncertainty. So your project should be creating new knowledge or improving existing processes, products or services through scientific or technological advancement.
Eligible R&D costs
Once you’ve established your project qualifies you can look at the following categories of expenditure for your R&D tax claim:
Accurate calculations of the expenditure incurred are key to determining eligibility for R&D tax relief.
Staff costs, including salaries, wages, bonuses and employer National Insurance contributions for staff directly involved in R&D activities, are eligible. This includes not only researchers and developers but also supervisors and managers overseeing R&D projects. Employer pension contributions for these employees can also be claimed. Payment to agencies or staff providers for workers involved in R&D activities are eligible as externally provided workers (EPWs) but the workers must work under your company’s supervision and direction to be eligible.
Costs of R&D activities subcontracted to third parties can be claimed but the eligibility criteria varies depending on company size and type of subcontractor. For small and medium-sized enterprises (SMEs) subcontractor costs are generally eligible, for large companies there may be restrictions.
Materials and resources consumed or transformed during R&D processes, such as chemicals, prototypes and components are qualifying expenditure. But items subsequently sold are excluded.
Software licenses essential for R&D projects are eligible. This includes off-the-shelf software and bespoke solutions developed specifically for your R&D activities.
Expenses related to data acquisition and cloud services directly supporting R&D activities are qualifying expenditure. This includes costs for data storage, processing and analysis services used in your R&D projects.
Payment to volunteers participating in clinical trials for R&D studies are eligible expenditure.
Financial contributions to independent research entities, such as universities or research organisations are eligible if the research is relevant to your company’s trade.
Benefits of Claiming R&D Tax Credits
Claiming R&D tax credits can have a big impact on a business. These credits are a source of funding for R&D activities and increase productivity for businesses and the economy. By innovation R&D tax credits can lead to change on a global scale. Businesses can reduce their corporation tax bill or get a payable tax credit – it’s a financial lifeline. The credits can be used to offset national insurance contributions liabilities – so even more benefit for companies investing in R&D.
Recent Changes to R&D Tax Relief
Make sure you’re up to date with recent changes to R&D tax relief to stay compliant and maximise your claim. Understanding how to claim relief is key to getting the most out of R&D tax credits:
For accounting periods starting on or after 1 April 2024 the government has merged the schemes for SMEs and Research and Development Expenditure Credit (RDEC) into one scheme. This will simplify the R&D tax relief process. Loss-making SMEs with R&D expenditure of 30% or more of their total expenditure are eligible for extra support. This extra support is a payable tax credit of up to 14.5% of the surrenderable loss so is really beneficial for R&D focused businesses.
Common Misunderstandings
Misunderstandings about eligible R&D costs can lead to missed opportunities or compliance issues. A good understanding of the tax credit claim process can prevent missed opportunities and compliance issues. Here are some common misunderstandings:
Many assume only product development qualifies for R&D tax relief. In fact R&D is a broad range of activities including process improvements, software development and technological advancements.
Another common misconception is that only successful projects are eligible. Even if an R&D project doesn’t achieve the desired outcome the costs can still be claimed as the attempt to resolve scientific or technological uncertainties is what’s important.
Standard data collection without the intention to achieve a scientific or technological advance doesn’t qualify. The project must aim to resolve specific uncertainties.
Many businesses overlook when assessing R&D claim costs the way indirect costs can contribute to the overall relief. Direct costs, such as staff wages and materials, are the obvious ones but indirect costs also play a big part in an R&D tax relief claim. If a company has a dedicated R&D facility or specific areas of the business premises are used regularly for R&D activities then a fair percentage of electricity, water and heating costs can be attributed to the claim. While rent itself is not an eligible cost, the utility expenses incurred during eligible R&D activities are.
Similarly software costs are underclaimed due to uncertainty around their eligibility. Many businesses use specialist software for design, testing or data analysis which is eligible for R&D tax relief. Whether it’s a paid subscription to a cloud-based platform that facilitates development work or a bespoke system developed specifically for a research project these costs should be claimed. But general software used for administrative purposes, such as standard office applications, does not qualify.
Stay Compliant and Maximise Your Claim
Accurate records of R&D activities and costs are vital. Expert knowledge and detailed support is essential to navigate the complexities of a tax credits claim. This includes timesheets, project notes and financial records.
Speak to our R&D tax specialists to identify all qualifying activities and expenses and make sure you have a comprehensive claim.