A Guide to R&D Tax Credits
R&D Tax Credits are a government incentive designed to reward UK companies that pursue innovation with increasing investment. The Research and Development (R&D) Tax Credit scheme was launched over 20 years ago and encourages companies in the pursuit of growth and innovation. This tax scheme provides valuable support for start-ups and is aimed at encouraging global competitiveness.
SMEs can reclaim up to 33% of the amount spent on Research and Development – even if they make a loss. R&D relief could be the financial lifeline for many start-ups!
Co-Founder of Finerva, Ben Rule oversees R&D Tax Credit claims and works with clients to ensure they receive the strategic and commercial finance support they need to help their business grow. Rule explains the benefits and importance of taking advantage of R&D Tax Credits: “At the simplest level cash is vital to all businesses and R&D credits are a source of cash which will help fund your activities. When looking at a fast-growing entrepreneurial business, cash runway and funding are of crucial importance. R&D payable tax credits are a fantastic way to provide funding for your business without you having to offer shares to investors and consequently diluting your equity position.”
“The financial benefit of R&D credits can lead you to take a decision to hire more people, hire quicker or hire more experienced people which will allow you to accelerate the growth of your business. So long as you are aiming to create a technological advance and there is uncertainty in how you are trying to achieve it -then R&D credits may allow you to take a bolder approach or be more ambitious with your goals as the financial risk is reduced because you can still claim R&D credits even if your project fails or you have to pivot”, says Rule.
So, how do R&D tax credits work for SME businesses?
We have outlined important information to help businesses understand more about the Government-backed tax incentive and why it is vital they need to be taking advantage of R&D opportunities for relief. By not doing so, companies could be missing out!
Who can claim and what qualifies a company for research and development tax credits?
For a project to qualify as an R&D Project and claim R&D relief, the HMRC requires that it meets 4 main criteria. You need to explain how a project:
- Looked for an advance in science and technology
- Had to overcome uncertainty
- Tried to overcome this uncertainty
- Could not be easily worked out by a professional in the field
The scope of what qualifies is vastly broad and many SMEs miss out on cash pay-outs or tax reductions because it seems it is only tech businesses that can take advantage of the tax relief scheme.
Fortunately, this is not the case, and many other industries can claim. Your project doesn’t need to be a huge breakthrough either. It could quite simply be the creation of a new process, product line or service or improving upon an existing one. The tax incentive scheme is based on effort and expenses, not just the result. This means that even if a project failed, it could still be eligible for R&D tax relief and your first R&D claim can cover up to 2 years of R&D costs.
What are the different types of R&D Tax Credits available?
There are two different types of R&D Tax Credits available to gain relief for a company’s research & developments costs. To work out which one your business is eligible for there are three main areas to review: staff numbers, turnover, and gross assets.
|THE SME R&D RELIEF|
|THE RESEARCH AND DEVELOPMENT EXPENDITURE CREDIT (RDEC)|
|You can claim SME R&D relief if you’re a SME with:|
-A staff headcount of less than 500
– And either a turnover of less than €100m or a balance sheet total less than €86m
Profitable companies meeting the above can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100%.
For loss-making companies, a claim can be made worth up to 14.5% of the surrenderable loss.
|To apply under RDEC, companies must have: |
– A staff headcount of over 500
– And either a turnover of over €100m or a balance sheet total greater than €86m
RDEC allows bigger organisations to claim back 13% of their eligible R&D expenditure.
What type of costs can you claim?
|COSTS YOU CAN CLAIM||COSTS YOU CAN NOT CLAIM|
|– Staffing costs (employees and pension contributions) |
– Consumable materials (e.g., gas, water, fuel, and electricity)
– Subcontractor or freelance staff costs
– Payments to clinical trial volunteers
– Certain types of software or software licenses
– Council taxes
– The cost of patents and trademarks
– Capital expenditure such as vehicles, land, office furniture, etc
Ben Rule shares advice about submitting R&D Claims: “At a superficial level R&D tax credits look like they are simple to claim. For some businesses this may be true. The moment you start having grants, larger corporate investors, costs coming from connected companies, etc then the situation is more complex. In this situation getting good advice is vitally important and valuable to you. If the wrong judgements or interpretations are made it can cause problems.”
Rule explains, “Whilst HMRC may pay your R&D Credit they can review it at a later date. Of equal importance is that if you are a company taking external investment then at some point you will likely undergo Tax Due Diligence at which point, they will review the R&D claim you have made. You don’t want an issue to be identified which delays the process, leads the investor to ask you to provide a personal indemnity or even scuppers a funding round.”
The Spring Statement March 2022 – R&D Tax Credit updates
The Government recently announced 3 important updates to the current R&D tax relief scheme in The Spring Statement 2022:
- The intention is to allow pure mathematics research to be included as qualifying R&D expenditure – for example in sectors of AI and robotics together with manufacturing and design.
- All cloud computing costs associated with R&D, including storage, will qualify for relief.
- The Government will continue to focus support more on innovation in the UK but will allow for R&D relief for overseas costs where there are:
- Material factors such as geography, environment, population, or other conditions that are not present in the UK and are required for the research, meaning expenditure must take place outside of the UK – for example, deep ocean research.
- Regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials.
More details will be set out in draft legislation to be included in the next Finance Bill before these measures come into effect in April 2023.
Take advantage of our winning track record with HMRC and our extensive knowledge & experience of what is eligible for tech and non-tech businesses.
The R&D tax rules are complex and can be difficult to navigate. It is therefore vital for businesses to seek specialist advice. Finerva supports businesses in preparing and submitting their R&D claims, making sure your business gets the most out of your R&D tax benefits.
How can Finerva help?
If you would like to speak to a member of our team about the latest R&D Tax Credit updates and how they impact your business, your eligibility and how Finerva can support you, please request a call on our website.
Use our R&D Tax Credits Calculator to see how much you could be eligible to claim.
Don’t miss the opportunity to recoup some of your investment costs from HMRC! Finerva is here to support businesses with fast, hassle-free R&D tax credit claims.
About Michelle Hind
Michelle Hind is the creative director at Chillibean Creative and a freelance brand consultant. She has a special interest in how the levels of employee motivation directly impact the quality of work presented to clients and determine the success of the overall brand experience – from staff through to client.
Michelle has experience working with teams operating in a flexible work environment. Her work as a multimedia journalist has been featured across the United Kingdom and Southern Africa.
She graduated from Rhodes University with a Bachelor of Journalism, majoring in journalism, media studies and psychology.