The UK government, through HMRC, offers R&D funding through an R&D tax credit scheme. This enables businesses to gain money off taxes based on funds spent on R&D purposes. The scheme is fairly generous and offers a wide range of companies an opportunity to pay lower taxes based on the research and development that they do. One problem with the scheme, however, is that not all businesses realise that they qualify for this R&D funding. This leads to them not claiming money that could help considerably in making their business more successful. Here we explain what businesses qualify for research and development funding of this nature.
What is the R&D process?
The UK has one of the most lucrative Research and Development (R&D) tax credit schemes on the globe. The European Commission highlighted this framework for its broad eligibility criteria for tax credits. Sadly, it seems that not that many businesses are applying to these schemes, even though they are eligible for them. It may be that you are eligible, even if you don’t think you’re conducting R&D. As always, it often pays to chat with a specialist to get a free assessment.
How does the R&D tax credit affect the effective tax rate?
R&D tax relief (we use this interchangeably with the term ‘R&D tax credits’) is available to ‘limited companies’ (we’ll just call these ‘companies’ from this point on), in the UK. This means that it is not available to all businesses in the UK. Companies like sole proprietors, partnerships, or alternatively, unlimited companies can not access the R&D tax credit. The current tax rate for companies is 19%, and tax credit schemes are applied to the final tax burden. Overall, the benefit for companies investing in R&D is great - 33.5% of eligible expenditure that can be set off or taken as a tax credit.
What are the R&D tax credit schemes?
There are two types of schemes for differently sized businesses that allow organisations to gain R&D funding in the form of tax credits or offsets. There is an SME scheme and the RDEC scheme (the latter was formerly known as the “large company scheme”). To qualify for the SME scheme, the company needs to meet certain requirements in terms of size and income. Specifically, the company should have fewer than 500 employees, and it must have either an annual turnover that is less than €100 million, or a balance sheet that is under €86 million. Companies that do not fit these criteria can claim under the RDEC scheme, but this is significantly less generous (though still worth pursuing!).
How do you calculate R&D?
Companies often think that they have to be working in Silicon Valley or some other high tech sort of business to be claiming R&D tax credits, but that simply isn’t true. UK government figures released in 2016 suggest that those claiming tax relief come from a variety of different sectors.
By far the largest number of claims are put in by manufacturing companies, information and communication companies, and professional, scientific and technical companies. However, claims have been submitted from a wide range of companies working in other sectors including in the real estate industry, in education, in construction, in agriculture and in the food industry. The important thing to remember is that research and development, under the HMRC classification is explained as follows:
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”
Typically, you can approximate the R&D credit to be around 33% of your business’ qualifying expenditure. If you use contractors, this is usually reduced to around 20-25%.
What qualifies for R&D tax credits?
You could be creating new IT systems, doing basic research or creating functionality that is innovative, or you could be making new recipes for your company to develop new products. You might be developing new manufacturing processes to develop products or services more efficiently or working on virtual reality advances.
All of these types of activities may be considered research and development by HMRC, and if you are not sure if you qualify it may be worth asking a specialist R&D Tax Advisor for help. Ultimately, the diversity of companies and products and services that qualify for RD tax credits is large, and it is definitely worthwhile considering if you are doing R&D to reduce the tax you are paying and increase innovation at your firm.
If you’re unsure if you qualify for R&D tax credits, we’re happy to help or point you in the right direction.
