R&D tax credits are one of many government incentives designed to encourage UK companies to invest in innovation, by providing businesses access to cash as a reward for their activities.
Who can make a claim?
Available to both SMEs and large companies alike, if your business is attempting to resolve scientific or technological uncertainties then you may be carrying out a qualifying activity eligible to benefit from the R&D Tax Credit scheme.
Three factors that can affect the value of your R&D tax credit claim:
- The size of your company
- The amount of corporation tax you pay
- Whether you are profit or loss-making
Offering a maximum return of up to £2.30 per £1 spent on R&D expenditure, the exact rate of return will depend on the size of your business, the amount of Corporation Tax you are required to pay and whether you are profit or loss-making. No matter your position though, there is benefit in making a claim.
Large company or SME?
Aside from being profit or loss-making, the difference in claim value will depend on your company’s size, with both the Research and Development Expenditure Credit (RDEC) scheme and SME scheme differing in the amounts of cash benefit a company can receive.
To be recognised as an SME under the scheme you must employ up to a maximum of 500 people with either an annual turnover not exceeding €100 (£86) million or a balance sheet not exceeding €86 (£74) million.
It’s also important to note that if your staff headcount is lower than 500, but you exceed both the turnover and gross asset thresholds, you will be classed as a large company for R&D relief and be assigned to the RDEC scheme.
What costs are eligible for R&D tax credit?
- Direct staff costs– this is the cost of paying your employees who have worked directly on the R&D project and include costs such as gross salaries (including wages, overtime and bonuses), employer NI contributions, employer pension contributions and certain reimbursed business expenses
- Subcontracted R&D– this usually means that a portion of your R&D project has been outsourced to another company for an agreed amount. Companies can claim up to 65% of their subcontracted R&D costs, but only under the SME scheme
- Externally Provided Workers (EPWs) – external workers employed to work specifically on an R&D project may be eligible for an R&D tax credit claim. External workers are individuals provided through a recruitment company or staffing provider e.g., agency staff, third party staff, contractors, or freelancers. Tax credit relief allows you to claim 65% of the payments made to the agency
- Consumables– materials and resources that are used up / consumed in your R&D process, such as water, fuel and power can be included in your claim. In addition, materials consumed or transformed in the R&D process can be included, such as materials used in the construction of prototypes. These costs fall into one of two categories either apportioned expenses or wholly R&D expenses. You cannot claim for materials which were not used up in the R&D process or used for products that were sold onto a client
- Software– software which was needed for R&D or involved in R&D activities may be included but must have been developed / purchased for the R&D project. This can include, for example, CAD or FEA software used for development, hosted development kits such as Sage Development and project management software. If the software was partially used for the R&D project, then its price must be apportioned. However, general software such as email hosting, Microsoft Office, ERP and MRP software costs and website hosting would be typically be excluded.
- Clinical volunteers– usually only relevant to pharmaceutical firms, the payments made to volunteers in clinical trials are eligible
Calculating your direct staff costs:
- Add up the total costs above for each employee who worked on the project
- Multiply this by the portion of the time they spent on the project in the claim year i.e. 40%
- Do this for all employees that worked on the project
In addition, large companies can include contributions to individuals or certain research organisations where qualifying R&D work was carried out.
Hopefully this has provided some valuable insight into R&D claims and highlighted the generous tax relief that is available. If you feel that you have qualifying R&D expenditure and would like a discussion to see if you have a valid claim, then please contact us and we will put you in touch with one of our R&D claims experts.