A Guide to Claiming R&D Tax Relief

We wrote this guide for business owners and managing directors who think they might be eligible for an R&D tax relief. The guidelines regarding qualifications are very vague. Many struggle to bring their projects to life due to insufficient funding. However, not many know when they are eligible for an R&D tax relief.

If you’re a company that works on innovative science and/or technology projects, it’s likely you are eligible to claim corporate tax relief for research and development (R&D). However, the government is deliberately keeping the definition of R&D broad. We assume the problem that brings you to this page is that you are unsure what are the steps to follow.

In this guide, we’ll look at how R&D claims work, how much relief you could receive and what the process looks like. We will also dip into the business eligibility of claiming R&D and how to prepare for it.

What is R&D Tax Relief?

R&D tax relief is a government’s incentive to support innovation-driving companies. It’s done by rewarding them by investing in their project. R&D tax credits aren’t exclusive to the development of new products only. They also apply for improvement of the existing concepts or advancement of knowledge in the sector the business operates in.

Additionally, R&D tax relief isn’t focused on products only but also covers processes, services, devices and materials. As stated in the beginning, the area R&D tax credits covers are broad, which results in uncertainties. However, since that’s a great source of income directed towards helping businesses grow, businesses willingly pursue them.

What Projects Qualify as R&D?

As per the official gov.uk explanation, R&D relief can support businesses involved in innovative projects in science and/or technology. Companies across different sectors can claim it, provided they are seeking to research and develop an advancement in their industry. It’s worth noting that the success of the project isn’t one of the criteria on which suitability to a benefit is ruled.

The key requirement to claim R&D relief is for the project to seek to advance in science or technology. Basically, projects concerning social sciences such as economics, or a theoretical field like pure maths, are ineligible.

It’s also important that the project has to relate to your business trade. The rules are still rather lax and it makes no difference whether it’s a current trade or trade you hope to start based on the outcome of the project.

To claim R&D relief you must explain how the project:

• sought to make an advance in science or technology

• had to overcome uncertainty

• attempted to overcome the uncertainty

• could not be easily worked out by a professional in the field.

Advances in the Field

The project must aim to advance in the field – not just within your business. Basically, this means that an advance can’t just be a technology that already exists in another sector, but you are the first to use it within your industry. However, the product, process or service can still be seen as an advance if it’s been created by another company but isn’t yet publicly available or known. 

Solving Uncertainties

Uncertainty comes when a professional on the subject is unable to say if something is possible technologically speaking, or how it can be done. Even after they have referred to all the evidence available. This means that your business or professionals in the field don't know about the advance yet or how to achieve it.

In terms of explaining how you tried to overcome the uncertainty, you’ll need to prove that the R&D is required to research, test and analyse in order to develop it. You’ll have to explain the work you carried out to overcome the uncertainty, which may simply involve describing the successes and failures you encountered during the project.

Different Types of R&D Relief 

There are two types of R&D relief and they’re both dependent on the size of your company. A Small and Medium Enterprise (SME) is defined by a staff count of no more than 500 and either a turnover of less than £100m or a balance sheet total of less than £86m. Anything that’s over these numbers is a Larger Company.

However, while these are the critical criteria, there are more considerations going into separating SMEs from Larger Companies. For example, group structures and grants.

SME R&D Relief

Among the above-described criteria, when clarifying whether your business is an SME, you might need to account for partnerships and linked companies.

R&D relief for SMEs enables them to:

• deduct an additional 130% of qualifying costs from their annual profit, on top of the standard 100% deduction. Meaning a total 230% deduction;

• claim a tax credit if the business is loss-making, worth up to 14.5% of the surrenderable loss.

Larger Companies

If you’re a bigger company, you can claim Research and Development Expenditure Credit (RDEC) for R&D projects. This type of credit is also available for SMEs and larger companies that have been subcontracted by a big company to carry out the project.

Up until 31 December, RDEC was a tax credit for 11% of qualifying R&D expenditures. But this increased to 12% from January 2018 and then to 13% from 1 April 2020.

Summary

There’s a lot of grey area surrounding the subject of R&D tax relief, and it’s almost as if it’s being maintained on purpose. However, this is a hugely beneficial opportunity for any business, and therefore worth the time invested into research.

Still unsure of how it works? Talk to us, we can help.