R & D Explained
Research & Development Tax Credits are a UK tax break aimed at encouraging companies to spend more on R&D activities, which the government believes are beneficial to the UK exonomy.
The benefit is received as a corporation tax refund or as a reduction in corporation tax payable.
Claims are submitted alongside the corporation tax return and can be made up to 2 years after the end of the period to which they relate. Many qualifying companies use the benefit to invest in further R&D activities, but they can be used for anything, which includes paying out dividends.
Broadly speaking, a project qualifies if it constitutes an “advance” in science and technology, which is defined as an improvement in overall knowledge and capability in a technical field.
A key factor in determining if a project qualifies is if uncertainty exists around the end outcome. This would typically be the case where you are attempting something that no others have achieved previously. Even successful projects can qualify for R&D tax credits.
As you would expect though, HMRC have some faily detailed guidelines on what constitutes R&D.
We’ve summarised the key criteria
Technical Uncertainty
If the project presented issues that your competent professionals were unsure they would be able to overcome…
Innovation
If the project if finding a solution that is not readily available in the market, then it points to possible R&D.
Cost
If a project incurs a significant amount of expenditure (+£50k) on skilled resource, then there’s a posibility there will be R&D involved.
Qualifications
If your project requires the expertise from knowledgeable employees and/or subcontractors that hold formal qualifications then it could constitute
Here are a few typical R&D costs.
These are just some of the most common types of qualifying expenditure. The full list is extensive and very much dependent on the industry in question.
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Subcontractor costs
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Technical analysis
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Management salaries
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Testing
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Prototyping
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Developing new processes
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Software licenses
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Hardware costs
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Premises expenses
How much can a company recover?
Profitable and loss making companies are able to recover between 15% and 16.2% of the amount they have spent on qualifying R&D expenditure.
| Profitable Company (£) | Loss making Company (£) | Loss making R&D intensive Company (£) | |||
|---|---|---|---|---|---|
| Profit prior to R&D claim | 1,000,000 | Profit prior to R&D claim | Profit prior to R&D claim | ||
| RDEC (20%) on 100,000 qualifying expenditure | 20,000 | RDEC (20%) on 100,000 qualifying expenditure | 20,000 | Qualifying R&D expenditure | 100,000 |
| Taxable profit/ (loss) | 1,020,000 | Taxable (notional) profit/ (loss) | 20,000 | Enhanced deduction | 86,000 |
| Corporation tax due (25%) | 255,000 | Corporation tax (19%) | (3,800) | Total corporation tax deduction | 186,000 |
| Less: RDEC | (20,000) | ||||
| Corporation tax payable | 235,000 | Corporation tax deduction sacrificed | (186,000) | ||
| Cash repayment | 16,200 | ||||
| Corporation tax payable when ignoring the R&D claim | 250,000 | Cash repayment (14.5%) | 26,970 | ||
| Corporation tax saving | 15,000 |
Wondering if you qualify for tax credits?
Get in touch, to get your free no-obligation tax credit calculation.
