UK R&D tax credits 101

In the UK, R&D tax credits are a way for the government to incentivise a wide array of businesses across many industries. Since the launch of this tax policy in 2000, Government spending has been over £40 billion in tax relief and cash credits. Find out if you are eligible to claim research and development tax credits, how to claim them, and what you need to be aware of in this guide.

What exactly are UK Research & Development tax credits?

Here’s how it works: In business, Research and Development occurs when a project looks to advance knowledge in science or technology and it is worth noting that the project doesn’t need to be successful to qualify, it just needs to aim to research or develop and advance in your field.

When a company invests time and money in innovative activity, the Government wants to support that and because R&D so greatly improves a country’s economic output, the Government wants to encourage businesses to keep doing this. They do so by reimbursing them some of the expenditure used on those activities. This relief is called a tax credit, and it’s a brilliant incentive enabling businesses to reinvest and grow. 

R&D tax credits can only be claimed at the end of your fiscal year and it is worth noting that HMRC must receive your Additional Information Form (AIF) before you submit your CT600. 

Whilst HMRC aims to repay within 28 days, the reality is it can take months. Some companies are heavily reliant on this relief to maintain their cash flow and others look to use the R&D tax credit to reinvest in their projects, both of which can be very time-sensitive. Because of this more and more innovative businesses are choosing to take out a Research & Development tax credit loan whilst they wait for HMRC to process their claim.

Who qualifies for R&D tax credits?

UK R&D tax credits are for limited companies that spend money on innovative projects, developing new or existing products, processes, or services. Companies from all sectors that invest in innovation can make an R&D tax credit claim to reduce their Corporation Tax or receive a cash rebate. Typically, it’s for:

• Technology Companies: Those involved in software development, hardware, or technological entrepreneurial activity.
• Manufacturers: Companies working on product development, processes, or machinery improvements.
• Biotech and Pharmaceutical Firms: Engaged in medical or scientific research to develop new drugs, treatments, or medical devices.
• Engineering and Construction: Involved in creating innovative construction methods, sustainable practices, or infrastructure development.
• Healthcare and Life Sciences: Engaged in medical research, improving healthcare procedures, or developing new medical technologies.
• Agriculture and Food Industry: Companies working on innovative farming methods, food safety, or product enhancements.

The scheme’s definition has been intentionally kept broad to cover as many industries as possible, and is not only limited to Scientific Research Organizations. Even if you don’t think that you qualify, it may want to seek advice, in case you do.

What counts as qualifying R&D expenditure?

What counts as a qualified R&D expense? You can use Research & Development tax credits to claim for anything that was used for qualified research activities. This includes:

• Employee wages directly involved in R&D activities.
• Costs of supplies and materials used in R&D projects.
• Contractor expenses for R&D-related work.
• Costs for renting or leasing equipment used in R&D.
• Prototyping and testing expenses.
• Costs associated with developing new products or processes.
• Research-focused software expenses.
• Some overhead costs related to R&D activities.

  

  You can not use R&D tax credits to claim for:

  • Routine testing and quality control processes.
  • Production and commercialization costs.
  • Research in the social sciences or humanities unrelated to technology or processes.
  • Acquisition or purchase of land or buildings.
  • Intellectual property rights and patents.
  • Capital expenses or investments in fixed assets unrelated to R&D.
  • Interest expenses or capital losses.
  • Costs related to activities that do not meet R&D eligibility criteria.

How do you claim for Research and Development Tax credit in the UK?

01. Determine Eligibility.

 Confirm that your activities qualify for R&D tax credits. These typically include work that seeks to advance knowledge or capabilities in a field of science or technology, however, it is best to consult with a tax professional about the specific R&D tax credit regulations that may apply to you.

02. Identify Your Qualified Research Expenses.

Pinpoint the specific projects or activities within your business that qualify for R&D tax credits. These projects in some way should have:

• searched for an advance in its field
• successfully overcame a scientific or technological uncertainty
• attempted to overcome a scientific or technological uncertainty
• was not solved by another professional in the field

03. Document and calculate your qualified Research Expenditures and Activities.

Maintain detailed records of your R&D activities and associated expenses. This documentation is crucial for substantiating your claim and demonstrating the innovative nature of the work.

04. Prepare an R&D Tax Credit Claim. You may need the following forms: 

• CT600 – Corporation Tax Return:
  • The CT600 form is the standard corporation tax return form that all companies must complete to report their taxable income, calculate the tax due, and provide additional information, including the R&D tax credit claim.

• CT600A – Additional Information:
  • Part of the CT600 submission, this form includes supplementary information related to the R&D tax credit claim. It provides details about the company’s R&D expenditure and the calculation of the tax credit.

• CT600J – Calculation of Adjustments:
  • This form is used to calculate the R&D tax credit to be claimed, considering the qualifying R&D expenditure and any adjustments required for the calculation.

• SME R&D Tax Relief: Making R&D easier (if applicable):
  • This is a supplementary guidance document provided by HMRC to assist small and medium-sized enterprises (SMEs) in preparing their R&D tax credit claims.

• Detailed Documentation Supporting the R&D Claim:
  • In addition to the above forms, you need to provide comprehensive documentation supporting the R&D activities and associated costs. This may include project descriptions, a technical justification report, financial records, and other evidence of eligible R&D expenditures.

It’s important to work with a tax advisor, R&D specialist or accounting professional familiar with UK tax laws and R&D tax credits to ensure accurate and compliant completion of these forms and supporting documentation. They can guide you through the process and help optimize your R&D tax credit claim.

05. Receive Approval and Tax Credits.

Once your claim is approved, you will receive the R&D tax credits or incentives, which could be in the form of reduced taxes or a direct monetary benefit. But note- this may take some time. If you prefer not to wait, you can get an R&D tax credit loan to access the money now, and pay back once received.

What R&D tax credit incentive is right for my business?

Companies are either classed as SMEs (small and medium businesses) or large companies.

There is a significant difference between R&D tax credits for Small and Medium-sized Enterprises (SMEs) and large companies, including

• Tax Credit Rates:
  • SME Scheme: SMEs often receive a higher rate of tax credit compared to large companies. The R&D tax credit for SMEs is typically more generous to encourage innovation in smaller businesses. The percentage of eligible R&D costs that can be claimed as a tax credit is higher for SMEs.
  • RDEC Scheme: Large Companies: Large companies generally receive a lower percentage of eligible R&D costs as a tax credit compared to SMEs. The tax credit rates for large companies are usually less favourable to level the playing field and prevent misuse.

The government announced in the 2023 Autumn Statement that from the 1st of April 2024, the SME and RDEC Schemes will be merged in a bid to streamline processes, prevent fraudulent claims and improve the overall costs that are incurred.

• Cash Benefit vs. Tax Deduction:
  • SME Scheme: SMEs often receive a cash benefit from R&D tax credits, meaning they can receive a cash credit or a reduction in Corporation Tax liability, which can be especially beneficial for startups and smaller companies.
  • RDEC Scheme: R&D tax credits for large companies is typically used to offset tax liability and reduce the amount of tax they need to pay.

• Cap on Benefits:
  • SMEs: There is a cap at £20,000 plus 300% of it total PAYE and NIC within the claim period, however, some SMEs may be exempt from the cap.

Large Companies: The RDEC cash credit is subject to a cap based on the PAYE and NIC paid to HMRC within the claim period. Any remaining cash credits in excess of the cap can be carried forward for use in future periods. 

When do you need to claim Tax Relief for Research and Development by?

It is essential that you follow the correct processes before trying to get tax relief. If you don’t, your claim might not be accepted:

• From April 1, 2023, you need to submit a claim notification form to notify HMRC, if you are claiming for the first time or your last claim was made more than 3 years before the last date of the claim notification period.
• Starting on August 8, 2023, you have to fill out an AIF (Additional Information Form) with more detailed information prior to submitting your claim. 

So then, what are R&D tax credit loans?

R&D tax credit loans are a financial service that allows businesses to access the value of their anticipated Research and Development tax credits before they receive them from the government. It is not uncommon for there to be delays in HMRC processing claims and this can inevitably cause problems for some companies for a variety of reasons.

That’s where R&D tax credit loans come in. Instead of waiting, lenders can advance the money to you within a matter of days. The business will work with the lender to get a loan based on the expected amount of tax credits they’ll receive, based on the tax computations and other supporting due diligence. Once HMRC processes, approves and pays your tax credits, the loan you received is paid back to the lender.

This benefits and supports businesses in getting access to funds they’ve earned through their innovative work, allowing them to reinvest in their operations, research more, or expand their business without waiting for the HMRC. It’s a way to keep the momentum of innovation going without delays.