Research and Development (R & D) Tax Reliefs Explained

R & D tax relief or credits are a tax incentive from the UK government designed to encourage and reward businesses for investing in innovation. The scheme has been around since 2000 and last year over 39,000 UK companies claimed almost £3.5bn in tax relief.  The project may include research or development of a new process, product or service or improve an existing one.

R & D reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects. Many businesses aren’t aware of these credits and are unsure as to what qualifies as research and development

There are two different schemes available. The Small & Medium Enterprise scheme (SME) and the Research and Development Expenditure Credit scheme (RDEC)

The SME scheme is the more common scheme and covers companies that have less than 500 employees and either an annual turnover of less than or equal to €100m or a balance sheet totalling less than or equal to €86m.

The RDEC scheme is mainly for larger companies or companies that carry out contracted R&D for larger companies. The amounts which can be claimed are different and there are some specific requirements for each scheme but the criteria are broadly similar.

 “How do I know if my project is eligible?”

R&D for tax purposes takes place when a project seeks to achieve an advance in science and technology. The activities that directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.

Certain qualifying indirect activities related to the projects are also R&D. These are activities which form part of a project but do not directly contribute to the resolution of the scientific or technological uncertainty such as support, clerical, finance and personnel services insofar as they are undertaken for R&D purposes.

An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not ready deducible.

An advance in science or technology may have tangible consequences (such as a new or more efficient cleaning product, or a process which generates less waste) or more intangible outcomes (new knowledge or cost improvements, for example).

Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field. This includes system uncertainty. Scientific or technological uncertainty will often arise from turning something that has already been established as scientifically feasible into a cost-effective, reliable and reproducible process, material, device, product or service.

Uncertainties that can readily be resolved by a competent professional working in the field are not scientific or technological uncertainties. Similarly, improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty.

The guidelines apply equally to work in any branch or field of science or technology. This means that work in software engineering, for example, is subject to the same fundamental criteria for being R&D as work in textile science, nanotechnology or anything else.

The following costs are eligible for relief:

  • Employee costs
  • Staff providers
  • Consumable materials
  • Utilities
  • Software used in the R&D
  • Subcontracted expenditure
  • Payments to clinical trials volunteers (large company schemes only)

Answering yes to the questions below indicates that a claim may be possible. However this will depend on the size of the company and the exact nature of the costs so the checklist should be treated only as a guide.

  • Is the work relating to the company’s trade?
  • Were there scientific or technological uncertainties which the project aimed to overcome?
  • Have you made certain that a competent professional in the field did not already have the knowledge?
  • Are there staff employed directly who are working on R&D (even if not for all of their time)
  • Are you paying a staff provider for staff engaged on R&D?
  • Are there consumable or transformable materials being used in the R&D?
  • Are payments being made to clinical trial volunteers?
  • Is power, water and fuel being used in carrying out R&D?
  • Is software being used in R&D work, for example to record the results of trials?
  • Are you subcontracting another person or organisation to conduct R&D?

If a subsidy or grant has been received in respect of the R&D work this may restrict the R&D claim. Capital allowances may be available for R&D capital items: the R&D relief discussed here is for revenue expenditure.

What information needs to be provided?

In order to submit an R & D Claim, the following four questions will need to answered and submitted to HMRC alongside the relief calculation.

  1. What is the scientific or technological advance?
  2. What were the scientific or technological uncertainties involved in the project?
  3. How and when were the uncertainties actually overcome?
  4. Why was the knowledge being sought not readily deducible by a competent professional?

Why claim R & D tax relief

The financial benefits could have a significant impact on a company’s corporation tax position or if you are not currently making a profit, you can claim a cash repayment from HMRC.

How we can help

TWP prepare numerous cases each year and have a 100% success rate on those they have worked on.

Call us to see how we can help you:
Stephen Nicholls, Corporate and Business Tax Manager. Tel: 01932 704 700 or email: s.nicholls@twpaccounting.co.uk