Innovation plays an indispensable role in a country’s growth. The UK Government has long recognised this and introduced the Research and Development (R&D) Tax Credits scheme back in 2000, for small and medium businesses. Through this scheme, the UK government offers incentives, thereby encouraging the UK employers to invest in innovation( Research & Development).

Let’s get into a detailed discussion around R&D tax credits and try to answer some of the frequently asked questions related to it.

R&D tax credits FAQs:

What are R&D tax credits?

Research and Development (R&D) tax credit offers support to the UK companies that are investing their resources in research and development projects in their respective fields. R & D Tax credit can even be claimed for projects that weren’t successful. 

SMEs that have a staff less than 500 and turnover less than or equal to €100m or a balance sheet amounting under €86m can claim R&D tax relief. However, there are other terms and conditions that SMEs need to fulfil which we will be discussing further.

How does the R&D tax credit work?

Under the SME R&D tax credit scheme, SMEs can claim up to 33% tax relief for their expenditure towards research & development purposes. However, not all projects fall under the research and development category. R&D should be specifically in the field of science or technology like innovating new and advanced processes/products or services that offer solutions to the existing problems. Some of these projects can include new software development, developing eco-friendly technologies, medical science development and others. Another qualification can be the scale and performance of the project.

If your business is spending money and resources on innovation and you are eligible to claim R&D tax credit, you can either receive a cash payment and/or Corporation Tax reduction. For businesses claiming the R&D Tax credit for the first time, they can claim support from the HMRC for their previous 2 years.

Is an R&D tax credit taxable income?

No, R&D tax credit is not taxable income and will be shown in the income statement( P/L account) in the form of either cash or a Corporation Tax reduction.

What costs qualify?

Typically the following expenditure on while working on R&D projects are considered when claiming for support:

  • Consumable items used while conducting the research
  • Software directly used in the R&D
  • Clinical trial volunteers during medical research
  • Contributions to independent research
  • Collaborative working with other companies/individuals 
  • Prototypes created for testing purposes
  • Subcontractor and freelancer costs

How do I claim HMRC R&D tax credits?

SMEs can claim R&D tax credits up to 2 years after the end of the accounting period. They need to provide their total qualifying expenditure on the full Company Tax Return form (CT600). The general process includes:

  • Assessing your qualifying R&D activities
  • Calculating qualifying R&D expenditure
  • Fill in the amount in the CT600 tax return and submit it

R&D tax credit rates

R & D Tax credits vary for loss-making and profit-making businesses as follows:

  • Profit-making businesses: The rate of relief is up to 25%. 
  • Loss-making business: The rate of relief is up to 33%.