Research and Development (R&D) tax credits have long been a key tool in helping UK businesses innovate and grow. As a government incentive, these tax credits encourage companies to invest in developing new technologies, processes, and products. However, the landscape of R&D tax relief is changing. From April 2024, the UK Government merged the existing SME and RDEC R&D tax relief schemes into a single, streamlined scheme.
What exactly are R&D tax credits?
R&D tax credits are government incentives to reduce a company’s tax bill or provide a cash lump sum. This financial support makes it easier for businesses to reinvest in innovation. Available to companies of all sizes, from large corporations to small and medium-sized enterprises (SMEs), R&D tax credits cover a wide range of industries and activities. It’s not just for high-tech or scientific research companies; if your business is working on advancing science or technology, you could be eligible.
Can you claim R&D tax credits?
A common misconception is that R&D tax credits are only available to companies involved in scientific research or high-tech industries. In reality, any company undertaking a project that seeks to advance science or technology can potentially claim R&D tax credits. This includes developing new products, processes, or services and significantly improving existing ones.
To qualify, a project must meet certain criteria set out by HMRC, such as aiming to create an advance in science or technology and attempting to overcome scientific or technological uncertainties. Importantly, these projects don’t need to succeed to qualify. Even if a project fails or the company doesn’t fully achieve its objectives, the R&D expenditure could still be eligible for tax relief.
How do R&D tax credits work?
The process for claiming R&D tax credits revolves around calculating the company’s eligible R&D expenditure and applying the relevant tax relief. The calculation differs slightly depending on whether the company is an SME or a large business.
For SMEs, R&D tax credits are particularly generous. To qualify as an SME, a company must have fewer than 500 employees and either an annual turnover under €100 million or a balance sheet total under €86 million.
Large companies that don’t qualify as SMEs can claim R&D tax relief through the R&D Expenditure Credit (RDEC) scheme. The RDEC offers a credit of 20% of qualifying R&D expenditure, which is taxable, resulting in a net benefit of 15%. While this rate is lower than the SME scheme, it still represents a significant incentive for larger companies to invest in R&D.
Changes from April 2024
From April 2024, the SME and RDEC R&D tax relief schemes were merged into a single scheme. This new approach follows the RDEC model but retains some benefits of the SME scheme. While the consolidation aims to simplify the process, it may result in reduced relief for certain SMEs, especially those that don’t qualify for the enhanced R&D intensive scheme.
The merger also introduces changes such as subcontracting rules and relief caps, making the claims process more complex. For example, for accounting periods starting from 1 April 2024, the subcontractor must be based in the UK to qualify for relief. This highlights the importance of staying informed and seeking specialist advice to ensure your business makes the most of the available relief.
How to make the most of your R&D tax credit claim
Given the significant financial benefits, businesses should approach the R&D tax credit claim process with a well-planned strategy. Here are some tips to ensure you’re getting the most out of your claim:
- Keep accurate records: Detailed records are key to a successful R&D tax credit claim. Document project objectives, methods, staff time, and all related costs. The more thorough your records, the easier it will be to support your claim.
- Identify qualifying activities: Don’t overlook potential R&D activities. Beyond obvious research, consider process improvements, software development, or trials. An R&D tax adviser can help spot all eligible activities.
- Understand eligible costs: R&D tax credits cover more than direct R&D expenses. Eligible costs include staff salaries, NICs, materials, utilities, and software directly used in R&D.
- Work in projects: Organise your R&D activities as distinct projects. HMRC prefers claims broken down by project, so keeping detailed records throughout the year will help create a well-structured claim.
- Review past claims: You can retrospectively claim R&D tax credits for up to two years. If you’ve missed claims in the past, consider reviewing those periods for potential eligibility.
- Seek specialist advice: While handling claims internally is possible, a specialist adviser can greatly increase the chances of a successful and maximised claim. They can identify all qualifying activities and navigate HMRC’s requirements efficiently.
How Pearson May can help you
R&D tax credits are an invaluable resource for UK businesses, providing financial support that can be reinvested into further innovation. Whether your company is a small startup or a large enterprise, engaging in activities that advance science or technology could make you eligible for significant tax relief.
To ensure you’re making the most of this opportunity, keep detailed records of your R&D activities, identify all eligible costs, and consider seeking advice from a specialist. With the right approach, R&D tax credits can provide the boost your business needs to stay ahead in a competitive market.
Get in touch with us today to learn more about how we can help your business innovate and grow.