Research and Development

Research and development (R&D) tax credits are a form of tax relief to incentivise UK companies to invest in innovation. They can reduce your tax bill or you can claim payable cash credits as a proportion of your R&D expenditure.

R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Note that it is not just the traditional industries such as life sciences that undertake qualifying R&D. R&D can be undertaken in almost any industry and the definition of R&D is deliberately wide ranging to ensure industries are not discriminated against.

Small and medium sized enterprise (SME) R&D tax credit claims provide a deduction of 230% on qualifying R&D expenditure. This deduction reduces the amount of taxable profits subject to tax at 20% and therefore provides a cash benefit of c26%. Additionally, if a company does not have any taxable profits (i.e. has taxable losses during the year), there is an ability to surrender taxable losses (up to the 230% deduction) for cash back of 14.5%. This in effect provides cash back of 33.35%.

The SME R&D tax relief scheme is available to companies having less than 500 employees that satisfies one of the following conditions: revenue less than €100m or balance sheet assets less than €86m.

If eligible, you can typically claim R&D tax credits for your last two accounting periods.

The tax credits are calculated based on your R&D spend. Qualifying expenditure includes:

• Staff costs including salaries, employer’s NIC and pension contributions;
• Subcontractor or freelance costs (subject to restrictions);
• Materials and consumables including heat, light and power that are used up or transformed by the R&D process;
• Some software costs.