R&D Tax Credits

For companies that want to push the envelope and change the face of their industry, the R&D tax credit is the perfect opportunity to reinvest in yourself. 

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R&D Tax Credits

The United Kingdom has an ambitious plan for rebuilding the nation's economy in 2021. A key component of that strategy is promoting research and development among small to medium-sized businesses as well as larger corporations. The UK government is looking to increase the country's R&D investments to account for 2.4% of the nation's GDP over the next six years.

The research and development (R&D) tax credit is built to help incentivize businesses of all sizes to reinvest in themselves, uncovering industry-wide advancements that improve the entirety of their field. For Britain's tech-based industries, R&D tax relief is a lifeline that provides the financial impetus for innovation.

Unfortunately, many companies are wholly unaware that the tax credit exists. Even if they are aware, they might not consider their company's business-related activities to fall under "Research and development." At the centre of the government's plan is a push to educate the public on the existence of the R&D tax credit, including a clear, concise view of the necessary qualifications and process for claiming the benefit.

How DS Burge & Co takes the stress out of R&D Tax Credits

How DS Burge & Co takes the stress out of R&D Tax Credits

  1. If you need help determining if you qualify for R&D tax relief we can help review your business activities and see if any of your projects meet the specified criteria
  2. The scope of your project must rise to a certain level in order to qualify for the credit. We can help calculate your qualified costs so you understand what relief you are eligible for
  3. We can also help with other areas such as VAT returns. Using us to help with your accountancy needs gives you the time to focus on innovating and pushing technological advancements. 
  4. As with other areas of tax, we can act on your behalf for any correspondence with HMRC.

Need help determining if you qualify for R&D tax relief ?

If you'd like to find out more about our R&D tax services or need help calculating your qualified costs, please don't hesitate to get in touch

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Need help determining if you qualify for R&D tax relief ?
How Do R&D Tax Credits Work?

How Do R&D Tax Credits Work?

The R&D tax credit is designed to reward companies with additional incentives for engaging in research that contributes to their field’s prosperity as a whole. The money obtained from R&D tax credit utilization can easily be reinvested in your company, letting you hire staff and get the resources necessary to scale your operations to meet the demands of your innovation.

Research-based tax relief can come in several different forms depending on your company’s size and the scheme under which you file. Those schemes include:

  • Small and medium-sized enterprises (SME) tax relief
  • Research and development expenditure credit (RDEC)

Therefore, depending on which scheme you are eligible for, you may receive your tax relief in any of the following ways:

  • Cash rebate
  • Corporate tax relief

No matter which scheme you qualify for, the R&D tax credit is built with flexibility in mind. You may apply for relief up to two accounting cycles (24 months) after your R&D activities have concluded.

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Claiming R&D Tax Credits

Eligible projects

The R&D tax credit offers businesses an attractive incentive for engaging in business-related research, but how do you know if your project qualifies? Fortunately, the government gives a clear prescription for eligibility.

Your innovative venture must be scientific or technological advancement, and it must be concrete; you cannot gain tax relief for something theoretical without a clear application to an existing industry. To know if your project qualifies for R&D tax relief, you must be able to answer these four questions:

  • Does my research seek to make advancements in my field?
  • Have qualified professionals within my field previously been unable to solve this particular problem?
  • Was the efficacy of my proposed solution surrounded by uncertainty before I completed my research?
  • Can I demonstrate a clear and repeatable method for eliminating that uncertainty?
Eligible projects
Qualifying costs

Qualifying costs

The scope of your project must rise to a certain level in order to qualify for the credit. Assuming it does, what costs are you able to include when calculating your benefit?

  • Staffing costs, including salaries and retirement contributions
  • All subcontractors used in pursuit of the research
  • Many types of specialized software
  • Consumable items
  • Payments to clinical trial volunteers

According to HRMC, the following costs are unfortunately excluded when figuring your relief amount:

  • Production of goods and services
  • All capital expenditures
  • Infrastructure such as land
  • Trademark development

Commonly asked questions

What happens if your project fails to achieve the proposed solution? As long as the research effort was made in good faith, you are still eligible to claim your expenditures. If your business is in the process of shedding costs and is loss-taking, you’re still eligible for the benefit as well.

What if your UK-based company is currently operating overseas? You still qualify for R&D relief as long as you meet your corporate taxation obligations. So there is no confusion; if you are a subcontractor doing work toward R&D for a larger firm, chances are you qualify as well.

Commonly asked questions

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Types of credits

As previously mentioned, there are two different kinds of schemes available for those looking to take advantage of R&D tax relief. The first is SME R&D relief which is aimed at small to medium businesses. You qualify for the SME relief if your business:

  • Has less than 500 employees
  • Revenue less than €100 million per year
  • Less than €86 million in gross assets

The SME relief allows your company to deduct both 130% of your qualifying costs and the 100% standard deduction for a combined total of a 230% deduction from your yearly profit statement. If your business is loss-making, you qualify for a tax credit equal to 14.5% of your surrenderable loss.

Types of credits

For a profit-making SME, we can “enhance” the R&D expenditure by an additional 130% to reduce the company’s corporation tax:

Example 1 (profit-making SME):
Taxable profits (before R&D claim) £400,000
Corporation Tax liability on profit at 19% rate £76,000
R&D expenditure (included in the profits above) £100,000
Tax credit value of R&D expenditure (130%, so 1.3 x £100,000) £130,000
Adjusted taxable profit before corporation tax (£400,000 – £130,000) £270,000
Adjusted Corporation Tax liability at 19% rate £51,300
Corporation Tax saving (£76,000 – £51,300) £24,700

For a loss-making SME, we have a few options available to us. The first two work in the same way as the profit-making SME example above. The final one results in a cash refund and is often the route taken:

  • Carried back to the previous accounting period
  • Carried forward and offset against future profits
  • Surrendered to HMRC in return for a tax credit (example below):
Example 2 (loss-making SME):
Trading Loss (before R&D expenditure) £150,000
Corporation Tax (not applicable as making a loss) £0
R&D expenditure £50,000
Surrenderable loss is the lower of: Unrelieved Trading Loss (£150,000 + £50,000) = £200,000 or

230% of qualifying R&D expenditure  (£50,000 x 230%) = £115,000
£115,000
Cash Refund (tax credit) for R&D activity (14.5% of £115,000) £16,675
The RDEC works slightly differently. It is reserved for larger-scale companies. As of April 2020, it is a simple above-the-line tax credit of 13%. While the RDEC is a boon to more sizable businesses, the R&D relief program has already proven to have a profound effect on small and medium businesses, with over 60,000 having taken advantage of the program over the years, according to the previously-referenced Accountancy Daily article.
R&D in action

R&D in action

Progress and innovation can be grey areas, no matter the strictures that the government definitions put on them. Some real-world applications for R&D include (but are not limited to):

  • Researching new raw materials
  • Environmental performance and green initiatives
  • Advancements in automation
  • New, large-scale IT infrastructure
  • Construction-based building process design and development
  • Updates to existing recipes or formulas to promote health, safety, and regulatory compliance
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Have been using DS Burge & Co ever since I started having to do a tax return both personally and for a limited company. Always very detailed and quick responses to any queries and thorogh explanations. Great at ensuring tax payable is the most efficient it can be. Would highly recommend.

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