The R&D tax credit scheme is a government initiative that offers tax relief for businesses conducting research and development (R&D) activities. The scheme is designed to encourage businesses to invest in innovation and help them grow and compete in the global marketplace.
History of R&D Tax Credit Scheme
The R&D tax credit scheme was first introduced in 2000 as part of the government’s Innovation Strategy. The scheme was designed to encourage businesses to invest in innovation and help them grow and compete in the global marketplace.
Since then, the scheme has been through a number of changes and is now more generous than ever before. In 2017, the government increased the rate of tax relief for small companies from 225% to 230%. For larger companies, the rate was increased from 130% to 135%.
The government has also introduced a number of initiatives to support businesses of all sizes with their R&D activities. These include the Small Business Research Initiative (SBRI), the Knowledge Transfer Partnership (KTP) and the Collaborative R&D Scheme.
In 2018, the government announced a further increase in the rate of tax relief for small companies to 240%. This is part of the government’s commitment to make the UK the best place in the world to innovate and do business.
Tax Reliefs Included in R&D Scheme
The scheme provides two main types of tax relief:
- A deduction from a company’s corporation tax bill for R&D expenditure
- A payable tax credit for small or medium-sized enterprises (SMEs) that are loss-making
To be eligible for the scheme, businesses must be carrying out R&D activities that seek to achieve an advance in science or technology. This could include developing new products or processes, or improving existing ones.
Businesses can also claim for R&D tax relief through the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
If you’re thinking of claiming for R&D tax relief, it’s important to get professional advice to ensure that you meet the eligibility criteria and understand the complex rules around claiming.
How Can R&D Tax Credits Benefit My Business?
R&D tax credits can provide a valuable source of funding for businesses undertaking eligible research and development activities. The relief can help businesses to offset the cost of their R&D expenditure, making it more affordable to invest in innovation.
R&D tax credits can also help businesses to attract and retain talented staff, as they can be used to offer employee share schemes or to reinvest in training and development programmes. In addition, the relief can help businesses to improve their cash flow as it is paid after the year end, meaning that businesses can access the funds earlier.
Types of R&D Relief Available
There are two types of R&D tax relief available in the UK:
- The Research and Development Expenditure Credit (RDEC)
- The Small or Medium-sized Enterprise Scheme (SMES)
The RDEC is available to all businesses, regardless of their size or sector. The SME Scheme is only available to small or medium-sized enterprises (SMEs).
To be eligible for the SME Scheme, businesses must have fewer than 500 employees and either an annual turnover of less than €100 million or a balance sheet total of less than €86 million.
In order to claim R&D tax relief, businesses must firstly register their R&D project with HMRC. They will then need to submit a claim form, along with supporting documentation, at the end of their financial year.
The amount of tax relief that businesses can claim depends on a number of factors, such as the type of relief they are claiming, the size of their company, and the amount of expenditure that is eligible for relief.
Businesses can claim either a fixed percentage of their qualifying expenditure or a payable credit against their tax bill. The percentage varies depending on the size of the company.
Under the RDEC, businesses can claim a payable credit of 11% of their qualifying expenditure.
How to Claim R&D Relief
In order to claim R&D relief, businesses must first register their project with HMRC. This can be done online through the HMRC website.
Once the project has been registered, businesses will need to submit a claim form at the end of their financial year. The claim form, along with supporting documentation, must be submitted to HMRC within two years of the end of the relevant tax year.
HMRC will then review the claim and decide whether to award the relief. If the claim is successful, HMRC will issue a certificate confirming the amount of relief that has been awarded.
R&D Tax Credits can be a complex area, so it is always advisable to seek professional advice before making a claim.
Demonstrating that a Project Qualifies for R&D Claim
1. Showing that a Professional Could Not Figure it Out: A project may involve an element of uncertainty where it is not immediately apparent how to achieve the desired outcome. This could be due to the use of new technology or a new application of existing technology.
2. Resolving Scientific or Technical Uncertainty: A project may seek to resolve scientific or technical uncertainty. This could include developing a new process or product, or improving an existing one.
3. Seeking an Advance in Science or Technology: A project must seek to achieve an advance in science or technology. This could be through developing a new product or process, or improving an existing one.
4. Carrying Out Experimental Activities: A project must involve carrying out experimental activities in order to resolve the scientific or technical uncertainty. This could include developing prototypes, testing new materials or processes, and conducting market research.
5. Creating New Knowledge: A project must create new knowledge that is not readily available. This could be through carrying out basic research, applying existing knowledge in a new way, or making improvements to existing products or processes.
In order to claim R&D tax relief, businesses must keep detailed records of their R&D activities. This includes keeping track of costs, staff time spent on R&D, and any tangible outcomes from the project.
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