In today’s competitive business environment, innovation is key to staying ahead. Whether you’re developing new products, improving processes, or solving complex technical challenges, research and development (R&D) activities are essential for growth. In the UK, the government offers R&D tax relief as an incentive to encourage businesses to invest in innovation. This relief can reduce your tax liability or, in some cases, result in a cash refund.
If your business is involved in R&D, you may be eligible for this valuable relief. In this blog, we’ll take you through what R&D tax relief is, who qualifies, the types of relief available, and the steps to claim it.
R&D Tax Relief is a valuable incentive designed to reward UK companies investing in innovation. It reduces your Corporation Tax bill or provides a cash credit for qualifying R&D expenditure.
There are two main types of R&D tax relief in the UK:
The SME scheme is designed to help small to medium-sized businesses that invest in R&D. It provides a generous tax benefit, offering an enhanced tax deduction for qualifying R&D activities.
Eligibility: To qualify as an SME, your company must meet the following criteria:
Relief: Under the SME scheme, businesses can claim up to 33% of their qualifying R&D expenditure, which can be a combination of tax deductions and tax credits. For a loss-making company, this can mean receiving a cash refund from HMRC.
The RDEC scheme is intended for large companies, or those that do not qualify under the SME criteria. The RDEC is a more straightforward tax credit, typically awarded to companies with over 500 employees or those receiving state aid for R&D projects.
Eligibility: Larger businesses that do not meet the SME criteria are eligible for the RDEC.
Relief: The RDEC allows companies to claim around 13% of their qualifying R&D expenditure, which is paid as a taxable credit. While this is less generous than the SME scheme, it still provides substantial financial relief for larger businesses.
The R&D tax relief scheme is designed to support businesses that are undertaking projects aimed at resolving scientific or technological uncertainties. Not all activities or expenditures qualify for the relief, so it's important to understand the criteria.
To qualify for R&D tax relief, the work being carried out must seek to achieve an advance in science or technology. This could include:
The following costs are generally eligible for R&D tax relief under both the SME and RDEC schemes:
Certain expenses are not eligible for R&D tax relief, including:
Claiming R&D tax relief can be a detailed process, and while the paperwork may seem complex, following the right steps can help you navigate the claim process smoothly. Here’s a step-by-step guide:
Before submitting a claim, make sure your business is carrying out qualifying R&D activities. Review your projects and determine whether they involve overcoming scientific or technological challenges. If in doubt, consider consulting an R&D tax relief expert who can help assess your activities.
It is vital to keep detailed records of all R&D activities, as well as the associated costs. This includes:
Good documentation is key to submitting a successful claim and avoiding any disputes with HMRC.
Calculate the total amount spent on qualifying R&D activities. This includes both direct costs (e.g., staff costs, materials) and indirect costs (e.g., overheads). Depending on the size and nature of your company, the amount you can claim will vary.
R&D tax relief claims must be submitted as part of your company’s Corporation Tax return (CT600). The claim should include detailed information about the project, the costs, and how your activities meet the criteria for R&D tax relief.
For SMEs, claims can be submitted alongside the Corporation Tax return, while RDEC claims are generally processed separately. You will also need to submit a technical report that outlines the scientific or technological challenges faced and how your company is addressing them.
Once your claim is submitted, HMRC may take several weeks to process it. They may request further documentation or clarification regarding your R&D activities. If your claim is successful, you will either receive a reduced tax bill or a cash refund, depending on whether your company is profitable.
To claim R&D tax relief in the future, you need to ensure that you continue to track all relevant activities and costs. Regularly update your records and consider reviewing your projects periodically to identify any new qualifying activities.
R&D tax relief in the UK offers a significant opportunity for businesses to reduce their tax liability and reinvest in future innovation. Whether you’re a small business or a large corporation, it’s important to understand the eligibility criteria and the costs that qualify for relief. By carefully documenting your R&D activities and expenses, and seeking professional guidance if needed, you can successfully claim R&D tax relief and keep your business on the cutting edge.
At Breaking the Mould Accounting Limited, we specialize in helping businesses navigate the R&D tax relief process. Our expert team can help you identify qualifying activities, calculate your eligible expenditure, and ensure your claim is submitted accurately and on time.
Contact us today to find out how we can help you unlock the full potential of R&D tax relief for your business.