R&D Tax Credits Explained

The R&D Tax Relief Scheme, in a nutshell, is a UK Government Legislated tax relief that allows companies to claim back tax in the form of cash or a credit towards a corporation tax bill. The Act can be found here https://www.gov.uk/guidance/corporation-tax-research-and-development-tax-relief-for-small-and-medium-sized-enterprises 

The tax credit is a form of government subsidy, designed to encourage companies to invest in research and development activities to develop better products, materials, chemicals, technologies and services. This tax credit is open to UK companies of all sizes who are registered for Corporation Tax and companies can claim even if they are not currently profit-making.

●R&D tax relief supports companies that work on innovative projects in science and technology.
●It is a government incentive designed to reward UK companies for investing in innovation.
●Companies that spend money developing new products, processes or improving existing ones, could be eligible.

Types of R&D Schemes

The government recently made several changes to the types of R&D schemes that are available. Currently there are:
SME Scheme, RDEC Scheme, Merged Scheme, R&D Intensive Scheme, Enhanced R&D Intensive Support Scheme.

R&D Technicians will qualify which is relevant for the claimant company based on multiple factors and ensure the best and most productive option possible will be made.

Qualifying for a claim:

●Note: All new R&D claimants that haven't made a claim within the last 3 years MUST pre-notify HMRC within 6 months of their  business year end, failing which they will LOSE ALL RIGHTS to make a claim for that period. Many companies wanting to do their own R&D claim, especially for the first time, are unaware of this pre-requirement and therefore end up losing out completely on any potential claim for that tax year.

Eligibility is much stricter now than ever before. 

If your company is actively working to address scientific or technological uncertainties, you may be engaged in qualifying activities for R&D tax relief. Qualifying activities could include:

●Developing new or improved products, processes, or services that aim to overcome technical challenges.
●Testing or experimenting with new materials, methodologies, or technologies to achieve a specific, innovative outcome.
●Advancing existing technologies by developing solutions that don’t yet exist in the market or are not readily available within your industry.

For a project to qualify for the R&D tax incentive, it must be able to address four specific questions. These questions are designed by HMRC to determine if the project meets the criteria for scientific or technological advancement.

1. What is the scientific or technological advance? The project must aim to make an advance in science or technology.
2. What scientific or technological uncertainties were faced? The work must seek to resolve scientific or technological uncertainties.
3. How did the project seek to overcome these uncertainties? There should be a systematic approach to overcoming these challenges.
4. Why couldn’t the advance easily be achieved by a competent professional? Important: The project should go beyond what is readily available knowledge or capabilities within the field.

What are the financial benefits?

Depending on your company's situation, R&D tax relief is offered in different ways. The options are:

1. Surrender losses for cash - Loss-making companies can surrender the lower of its enhanced R&D expenditure or trading loss. This provides immediate financial relief and useful for start-ups that may not be profitable.
2. Reduction in corporation tax - For profitable companies, R&D tax relief allows the company to deduct the enhanced R&D expenditure from its taxable profits, resulting in lower tax or reducing it to nil.
3. Carry back losses - R&D tax relief allows companies to carry back losses generated from the qualifying R&D expenditure to previous accounting periods. This can lead to a repayment of CT already paid.
4. Carry forward losses - Losses generated by qualifying R&D expenditure can offset the loss against future taxable profits and therefore remains valuable for future financial periods when the company becomes profitable.
5. Surrender to group relief - If a company is part of a group, the losses generated from qualifying R&D expenditure can be offset to its other companies who are profitable, reducing taxable profits.

How do you claim R&D tax credits?

A company can create and submit an R&D claim without the help of a R&D tax specialist ... but most wise companies use one to make sure they’re claiming for everything possible. Usually, using a specialist makes the process of claiming R&D tax credits a lot easier because they can quickly access what does and doesn’t qualify within a claim.

Specialists are also experienced in the report writing process, and will use language that HMRC is looking for in order to assess and approve the claim. The specialists are also there to assist with any HMRC enquiries should they arise, which has become more prevalent of late due to multiple factors, but an experienced specialist will most often ensure that technical or legal requirements are maintained according to the statute.

WARNING: The R&D Tax Credits process is complicated and requires expert guidance in order to ensure full tax law compliance and the best possible tax advantage. It is highly recommended that recognised, duly qualified specialist vendors process any claims, regardless of the type of R&D, the industry or the monetary value of the potential claim.