Research & Development (R&D) tax credits are an HMRC incentive to reward the time and investment businesses put into creating or improving products, processes or services. They encourage innovation. And they keep UK businesses and therefore our economy on the front foot.
WHAT IS RESEARCH AND DEVELOPMENT (R&D)?
R&D is when businesses actively improve and develop new products and processes. It helps businesses remain competitive, launch new offerings, improve existing ones and make a profit. However, we’ve found R&D sounds too complex. Too much like rocket science. And it sets the bar too high in people’s minds about what qualifies and what doesn’t.
We remove the misconceptions. And we’ll show you there’s a lot more to R&D tax credits than white coats, labs and innovation centers. Put simply, it comes down to two things: 1) You’ve made some changes to a product or manufacturing process, and 2) These changes weren’t obvious or easy, and you weren’t sure how to do them from the off.
So, if you’ve made changes that took some thought, some time and some testing – it’s time for us to talk. “R&D”, for tax relief purposes, is more than what you may think.
HOW DO R&D TAX CREDITS WORK?
This is the package of financial support provided to UK businesses by the Government via the tax system to encourage Research & Development (or ‘R&D’) activities. In other words, a mechanism by which to reward companies for the development of new or improved products, processes, and services.
The R&D tax incentives regimes have been designed to incentivise companies incurring costs undertaking scientifically or technologically challenging projects. It is called “R&D” but the sort of projects which can qualify are much broader.
So why the asterisk? Let us explain: R&D tax credits are a specific subset of the suite of R&D tax incentives available for businesses. However, these are commonly and collectively referred to as R&D tax credits. To avoid confusion, we will provide everything you need to know about R&D tax incentives but using the R&D tax credits terminology. There will be more on the differences later.
HOW DO I QUALIFY FOR R&D TAX CREDITS?
There are two halves to R&D tax credit claims TECHNICAL and FINANCIAL, let’s take a look at the Technical first:
To qualify for R&D tax credits a company needs to be undertaking technical activities that meet a special definition of R&D for tax purposes. The good news is that R&D for tax purposes is far wider than companies often initially expect. For a project to qualify for R&D tax credits it must meet the following two criteria:
Seeking an advance in science or technology.
Whilst resolving scientific or technological uncertainty.
Simply put, projects that include some element of improvement, where there is not an obvious or standard technical solution, will potentially qualify. You can find further commentary on the qualifying R&D criteria and how these are derived from the Department for Business, Energy and Industrial Strategy (‘BEIS’) Guidelines here.
It is important to note that R&D tax credits are not specific to any one sector or industry, so if you are in food or engineering, retail or software, agriculture or manufacturing, the likelihood is that your business will be undertaking some form of qualifying R&D activity.
You may ask who can identify the qualifying R&D activity in my business? There is one, and only one, answer to that question. It is not your Finance Director. It is not your Tax Manager. It is not your Accountant. It is not even your R&D tax credits adviser. It is the technical people in your business who are best placed in the business to understand the R&D being undertaken and apply the BEIS guidelines. For R&D tax credit purposes, these people are competent professionals. Only your competent professionals are suitably qualified to identify the R&D activities in your business.
Secondly, your business must be incurring qualifying R&D expenditure and therefore you need to identify costs that you have incurred in undertaking the R&D projects. You can claim internal staff costs, payments to contractors or third parties supplying workers, consumables, software licenses, and expenditure on water, fuel, and power.
WHICH R&D TAX INCENTIVES ARE AVAILABLE TO MY BUSINESS?
This will largely depend on whether you are an SME or a large company for R&D tax credit purposes. The criteria for each are as follows:
SME (SMALL & MEDIUM-SIZED ENTERPRISES)
Your business has less than 500 employees and either not more than €100 million turnover or €86 million gross assets. This is measured on a global group basis, so if your business is part of a group, or connected to other businesses you may need to consider their financials as well.
If your company is not eligible to claim under the SME criteria mentioned above, you may be in a position to claim under the large company scheme.
ESTIMATE HOW MUCH YOU COULD CLAIM ON R&D TAX INCENTIVES
Have you ever wondered whether you could make a claim for R&D tax incentives? Or, if you’ve already made a claim, maybe you want to find out how it stacks up against your industry peers and expectations? Our R&D Tax Credit Calculator answers those questions and gives you an instant estimate of the benefit available to you.
So, back to the asterisk – what about the terminology?
There are only three types of relief available, and each one has a specific name:
R&D tax credits: This is the payable tax credit available for loss making SMEs.
R&D Expenditure Credits: This is the payable credit available for claimants under the Large company regime.
R&D tax relief: This is the additional deduction from taxable profits available for profit-making SMEs.
If you hear anything else, it will likely be a collective name for some or all of the above.
How much is an R&D tax credit claim worth?
The amount that your business receives depends on two factors: (i) the type of relief claimed (R&D tax relief, R&D tax credits or R&D Expenditure Credits); and (ii) the amount of qualifying R&D expenditure.
We cover qualifying R&D expenditure in our dedicated section here. As an illustration, for £100,000 of qualifying R&D expenditure, the benefit under each incentive is as follows:
R&D tax relief: £100,000 x 130% = £130,000 additional deduction from taxable profits. At 19% corporation tax this generates a tax saving of £24,700 (equivalent to 24.7% of your total expenditure).
R&D tax credits: £100,000 x 230% (i.e., the principal amount plus the additional deduction) = £230,000. Surrendered at 14.5% for a payable tax credit of £33,350 (equivalent to 33.35% of your total expenditure).
R&D Expenditure Credit: £100,000 x 13% (rate from 1 April 2020) = £130,000. This credit is taxable at the prevailing tax rate for the period, so at 19%, the net benefit is £10,530 (equivalent to 10.53% of your total expenditure).
Benefits of R&D tax credits
R&D tax credits exist to encourage companies in the UK to innovate, take on technically challenging projects, create highly skilled jobs and grow their business and the economy. At Cooper Parry we love nothing more than supporting businesses locally and nationally and are proud to provide a route to funding innovation.
R&D tax credits qualifying criteria
To qualify for R&D tax credits a company needs to be undertaking technical activities that meet the Department for Business, Energy and Industrial Strategy (‘BEIS’) Guidelines on the Definition of R&D for Tax Purposes (you can download your own copy of the BEIS Guidelines here).
So, what are the BEIS Guidelines, what do they tell us and how do you apply it to your company?
To ensure that the generous incentives provided by the Government are completely industry agnostic BEIS drafted guidelines back in 2004 (and later updated in 2010) to set out exactly what does and does not qualify for R&D tax credit purposes. In defining qualifying R&D activities, the Guidelines focus on two key criteria, and state that to qualify a project must be:
Seeking to achieve an advance in the field of science or technology
Through the resolution of scientific or technological uncertainty
That all sounds well and good, but what does it mean in practice? What is this advance and uncertainty?
Advance in science or technology
Let’s start with an advance in science or technology. The Guidelines provide examples of what an advance in overall knowledge or capability in a field of science or technology may be.
Extending overall knowledge or capability in a field of science or technology i.e., generate new knowledge. Are you developing knowledge of a new process that is not available in the public domain? Or are you finding new uses for materials that have not been proven previously? These could be examples of extending the overall knowledge or capability in the field.
Creating a new process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology. Are you creating something completely new that did not exist before? Is your product the first to the market or the first to be developed in that way? This is not just in your business, but in the entire public domain. Or are you building upon existing knowledge or technology? If so, this may be more aligned to an appreciable improvement in 3).
Making an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes. Are you taking an existing technology, product or process and improving it by making changes of a scientific or technical nature? Most companies fall into this category as they are often building upon their own existing products and the knowledge in the public domain.
Use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way. Are you attempting to create a product that has the same properties of an existing product but for half the price? Or maybe you are seeking to improve a process by modifying a technology from another industry.
In short, if your business has technical people working on projects that have a scientific or technological aspect, there is potential that they will qualify. A couple of important points that are often missed:
The company does not have to be successful in achieving the advance. So, for R&D tax credits purposes, failed projects are good news!
However, just because science or technology is used in a project, it does not necessarily mean that it qualifies as R&D. For example, if new machines are acquired to improve manufacturing efficiency, there may be a business improvement (i.e., reduction in manufacturing costs) but there is not an improvement from a science or technology perspective, nor are there likely to be any scientific or technological uncertainties.
RESOLVING SCIENTIFIC OR TECHNOLOGICAL UNCERTAINTY
So, what is scientific or technological uncertainty? This is where achieving the advances sought is not routine and can come in many different forms:
Situations where the company are not sure if it is feasible to achieve the scientific/technological advance.
Perhaps it is feasible, but it is unclear how to achieve it in practice and the best way to proceed is not clear or not readily deducible.
Perhaps there is system uncertainty in getting different technologies or technological/scientific techniques working properly together.
There is a judgement to be made by the company’s “competent professional” as to whether a scientific/ technological challenge is routine/readily deducible to resolve (i.e. not R&D) or is scientifically/technologically uncertain to resolve.
The company’s R&D effort starts from the moment the company commences resolving scientific/technological uncertainty, e.g. feasibility studies early in the project lifecycle, and ends when the company is confident the uncertainties have been resolved, e.g. during testing/trials.
R&D that fails and is aborted can still qualify for relief.
R&D typically ends once a product or process has been brought to market. However, it may re-start if new scientific/technological uncertainties arise that need resolving to create an improvement after this time.
WHAT MAKES US THE NUMBER ONE R&D INCENTIVES PRACTICE IN THE REGION?
Our experience means we know what to look for
We’ve worked on R&D tax credits and incentives since it all started in 2000. And our Tax Partner Chris Knott is on HMRC’s R&D Consultative Committee that helps set Governmental policy on R&D incentives. That means we know how it works and we understand the context behind each change. Not only are our team part of Tolley’s 2018 Best Regional Tax Practice, but they also specialise in technical areas such as IT, Engineering and Manufacturing, Food, Pharmacology and Science. So, when it comes to your business, whatever the industry, we know what we need to find.
Face to face communications and quicker claims
You might consider R&D tax credit claims to be onerous and painstakingly slow. But with our experience, approach and relationship with HMRC, we have a slick process for getting claims submitted and approved. We’ll also keep you informed along the way. And we love visiting clients – their workshops, factories and offices. We’ll show you exactly what you can claim in real-time, and in good time. Fancy showing us around?
We’ve sent five satellites into space
Well, we haven’t. But we could have. Since August 2017, we’ve found our clients over £50m in R&D tax credit claims. That’s the equivalent of 1,689 jobs at the UK’s average salary, buying 2,889 Mini Coopers or even sending five small satellites into space. (Our astrophysics and R&D specialist, Mark, worked that one out.)
Our work has helped our clients pay for new equipment, new buildings, expanding their team, or even their other accountancy fees! All in all, it helps to keep businesses growing, innovating and moving forward. And that’s what we’re all about.