RESEARCH & DEVELOPMENT SERIES

Research and Development Tax Credits

Incentives for Innovation and Investment in R&D

Eligible R&D Activities

To qualify for R&D tax credits, a project must involve the creation or improvement of a product, process, or service through the resolution of scientific or technological uncertainties.

Examples of potentially qualifying activities include:

Please note that this is not an exhaustive list, and eligibility will depend on the specifics of each project.

R&D Tax Credit Report

An essential component of the R&D tax credit claim process is the preparation of a comprehensive report that details the project, its objectives, the scientific or technological uncertainties it aims to address, and the eligible R&D costs incurred.

The report should include the following sections:

UK R&D Tax Credit Scheme

In the UK, there are two primary R&D tax credit schemes: the Small and Medium-sized Enterprises (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme, designed for larger companies. The SME scheme offers more generous benefits but has specific eligibility criteria based on the company’s size, turnover, and balance sheet.

Under the new rules, effective from April 2023, the SME scheme provides tax relief of up to 186% on qualifying R&D expenditures, meaning that for every £100 spent on eligible R&D activities, a company can deduct £186 from its taxable profits. This can significantly reduce the company’s corporation tax liability.

Loss-Making Companies and R&D Tax Credits

Loss-making companies, particularly SMEs, can also benefit from the R&D tax credit scheme. Instead of carrying the loss forward or backward to offset against future or past profits, a loss-making SME can choose to surrender the loss attributable to R&D expenditures for a cash credit from HM Revenue and Customs (HMRC).

This is particularly beneficial for startups and early-stage businesses that may not yet be generating profits. The cash credit is calculated as 10% of the surrendered loss. For example, if a loss-making SME has £100,000 of qualifying R&D expenditures, it can surrender the loss related to the £186,000 tax deduction (186% of the expenditure) for a cash credit of £18,600 (£186,000 x 10%).

To claim the R&D tax credit, the company must submit the R&D tax credit report, along with its corporation tax return (CT600) and any relevant supporting documents, to HMRC. It is essential to ensure that the report is accurate, complete, and compliant with HMRC’s guidelines, as errors or omissions can lead to delays, adjustments, or even rejections of the claim.