R&D Tax Credits Explained

Research and Development tax credits are designed to encourage UK companies to invest in innovation and increase spending on R&D activities throughout the business. It’s one of the UK government’s top incentives for encouraging homegrown investment in research and innovation.

The incentive allows companies to recover a percentage of a company’s R&D spend as a cash repayment or a reduction in Corporation Tax, even if the project fails.

The practice allows profitable and loss-making SMEs to get back up to 33% of the amount they’ve spent on R&D projects. Large companies can claim up to 10% of their R&D spending back.

How Does R&D Tax Credits Work?

Companies that spend money developing new products, processes or services; or enhancing existing ones are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment or a corporate tax reduction.

What Costs Qualify For R&D Tax Credits

Qualifying expenditure for R&D tax credits includes:

The level of expense depends on the amount of R&D activity that can be claimed. This is a broad subject and includes various elements of day-to-day business activities and operations.

What Activities Qualify For R&D Tax Credits?

R&D activities are activities or projects that are solely focused on creating a level of improvement or advancement. These are not routine activities and must have an element of technical uncertainty or risk associated with the outcome when the solution is not immediately obvious or easy to obtain.

Does Software Development Qualify For R&D Tax Credits?

Most companies will likely have a level of software development in modern business. Software development can be considered a qualifying expense for R&D tax credits. It is much harder to separate routine software development from software development that qualifies for tax purposes.

Benefits of R&D Tax Credits

R&D tax credits offer valuable financial support for every business. It also helps businesses in every sector in the UK develop world-leading products and services. The major benefits include:

Who is Eligible for R&D Tax Credits?

Any business in any industry could be eligible for R&D Tax Credits. To meet the requirements, your business must have undertaken qualifying research and development activities such as creating new products or services or changing an existing product or service.

HMRC has incredibly detailed criteria which your project has to meet to be eligible for a tax reduction or cash repayment. An example that would qualify is a logistics platform calculating how to get a product to the right locations on time and pricing them correctly.

If a company sets up a new WordPress site, it wouldn’t qualify for R&D tax credits. The scale and performance of your R&D project can also make a difference. If a website is designed to send quick messages and images to each other, it is unlikely to qualify.

However, if the website is a hit and caters for millions of daily active users, it could qualify because of the technical challenge involved in keeping that website going.

Another example is if a company creates a search tool that can search a few hundred documents on a hard drive, it is unlikely to qualify. However, if the tool can provide instant results while searching thousands of documents over a shared network, it likely could.

How Much R&D Tax Credit Can I Claim?

The R&D tax credit schemes return a percentage of the amount that your business has spent on R&D in the past financial year. The percentage that you are able to claim will largely depend on the size of your business and its financial performance. The percentage of R&D tax credits you can claim has recently changed for accounting periods beginning on or after April 1st 2023.

SME R&D Tax Credit Changes Post April 2024

For financial periods beginning on or after April 1st 2023, the rates for R&D tax credits changed:

Companies Financial Position:

R&D Incentives For SMEs

There is also a new tax credit category for SMEs, these are called R&D incentive SMEs. They are defined as companies with at least 40% (30% from April 1st 2024) of total expenditure on qualifying R&D. They are eligible for a higher payable R&D tax credit rate of 14.5% receiving a credit of £7 for every £100 of R&D expenditure.

Can I Make An R&D Tax Credit Claim If I Have A Grant?

If your business has received a grant, an R&D claim can still be made. It is likely to impact the value of the claim as it is not likely that you are an SME the project grant is based on will then fall into the RDEC scheme which is not as advantageous.

The RDEC Scheme

Companies that don’t meet the financial criteria are eligible to claim money under the RDEC scheme. While these are less beneficial for companies, they give you 9.7% of your project costs. This cashback is open to both profitable and loss-making businesses. If you are an SME but a project you’re running is funded, it’s likely that the project and its costs will be needed to claim under the RDEC scheme. This doesn’t impact any other project you’re running, which can still be claimed under the helpful SME R&D tax credits scheme. It’s possible that you are likely claiming cash from both schemes, however, the application process can become quite complicated. Working with a team such as CapEx Associates will ensure you keep on top of your documentation.

The New R&D Merged Scheme

From April 1st 2024, the government have implemented a new R&D merged scheme which sees the current SME and RDEC schemes merged under a single scheme. This sees many changes, especially for SMEs or businesses who receive grants for R&D. The scheme introduces a ban on claims relating to R&D activities that take place overseas, if the R&D activities can be replicated in the UK then they will not be claimable against the new R&D merged scheme.

How Far Back Can I Make A Claim For R&D Tax Credits?

A business can submit an R&D tax relief claim at any time up to a year after the filing due date of the company tax return for the last financial year. This means that a business can claim R&D tax relief going back 2 full financial years. The claim can be made in a company tax return or an amendment to it.

How Long Does It Take To Recieve The Funds From An R&D Tax Credit Claim?

HMRC committed to a payout SLA of 28 days for both  SMEs and RDEC claims. However, this was moved to 40 days in 2022.

What Should A Company Do Before They Make Their First Claim?

Companies should inform HMRC in advance that they are planning to make a claim. They will need to do this within 6 months of the end of the financial year in which the claim is being made.

It is best to speak to a tax advisor as soon as possible to determine whether you are eligible to make a claim and ensure that your pre-notification is made within the correct timeframe.

Contact CapEx Tax Specialists today to discuss your claim and gain our help and advice for your R&D tax credit claim.

How to Claim R&D Tax Credits

If you’ve got an R&D project that you think would be eligible for R&D tax credits, CapEx Associates are here to help. If you own a small business in the West Midlands or a larger company with branches across the UK, we can support you in your application to claim R&D tax credits. We use a rigorous process to deliver R&D tax credit applications that maximise every element of your project and will stand up to HMRC evaluation. We want to find out more about your business and discuss how we might be able to support you in your tax credit claims.

Get in touch
 with our expert team today to see if you’re eligible to make an R&D tax credit claim.