Let’s get into a detailed discussion about 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 credits offers support to UK companies that are investing their resources in research and development projects in their respective fields. R&D tax credits can even be claimed for projects that weren’t successful.
SMEs that have a staff less of 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 fulfill, which we will be discussing further.
How does the R&D tax credits work?
Under the SME R&D tax credits 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 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 credits taxable income?
No, R&D tax credits 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 for 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 credits 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%.