Making Sense of R&D Tax Credits
Many businesses would like to innovate but lack the resources to do so. R&D tax credits are designed to unlock a world of new opportunities.
In a world of digital transformation, the pressure to invest in research and development has never been greater. Standing still often means being left behind, but innovation comes at a cost and that’s a price many SMEs will struggle to afford. R&D tax credits are designed to provide an answer and, for some businesses, they could provide the crucial capital injection they need to grow.
The Government is keen to plug what many see as an alarming gap in research and development. According to the latest figures from Eurostat, the UK ranks only 11th among EU members in terms of R&D expenditure. With Brexit on the horizon and – at the time of writing at least – no clear indication about what it will look like, R&D tax credits represent one of the Government’s most important tools to make the UK as attractive as possible to businesses.
- R&D tax credits are available through two schemes. The first, aimed at SMEs, is much more generous and, allows firms to ‘deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction’. If the company is loss-making, you may claim a tax credit worth up to 14.5% of your surrenderable loss.
To qualify as an SME for R&D tax credit purposes, you must have fewer than 500 members of staff and a turnover lower than €100million or a total balance sheet of less than €86million.
If your turnover is higher or you are majority owned by a large company or have received investment from a large company of more than 25%, you will qualify for large company R&D tax relief. This provides 12% relief of your qualifying R&D expenditure.
How it works
You should be eligible for R&D tax credits if you are either looking to develop new processes, products and services or enhance what you already offer. You can make a claim to receive either a reduction in your corporation tax liability or a cash payment.
In order to qualify, you must be able to show that you fulfil the following criteria:
- Limited company in the UK which is subject to corporation tax.
- Have carried out research and development which qualifies for the scheme
- Can show that you spent money on these activities.
The scope of R&D tax credits is extremely wide. It can apply to a company of any size and operating in any sector and if this is your first application you may be able to apply it to your last two accounting periods.
What can you claim for?
The scope was purposely designed to be broad. If you are taking a risk or investing money in resolving any problem, ironing out technological uncertainties or developing innovative products you will be undertaking a qualifying activity.
It could be a new product or service that you are bringing to market. This could include, for example, creating an innovative piece of technology which resolves a problem in your sector. Alternatively, it could simply be improving what you already have such as upgrading your existing products or implementing a digital transformation strategy within your business.
Any costs which you can show directly relate to your R&D activities may qualify. This might include staff salaries and NIC contributions, materials and infrastructure used as part of the R&D, some software and, when appropriate, payment for people undertaking clinical trials.
On the downside, this broad approach has opened the door to abuse and the Government is introducing a raft of new measures to tighten up on those areas which it believes are open to mis-use. All in all, they believe this will produce an additional £4.8bn in new tax revenue. The 2018 Autumn budget saw the Government reintroduce a PAYE and NIC cap which had been abolished in 2012. From the accounting period ending in April 2020 the limit will be set at 300% of the company’s total PAYE and NIC for that period.
The cap is intended to combat abuse and ensure the tax credits achieve their main aim of increasing private sector R&D investment, but it can create added complexity.
Even so, this represents an exciting opportunity for your business. To take advantage of it, you need to first understand what activity qualifies and what type of R&D tax credit scheme you should choose from.
The popularity of the scheme has attracted increased scrutiny and you will need to make sure you comply with the rules. Accountancy firms are offering a range of additional services specifically aimed at both SMEs and larger companies to help them stay within the law while ensuring they qualify for every piece of tax relief to which they are entitled.