Research and development tax credits are a government incentive aimed at rewarding businesses for investing in innovation. Find out if your software development project is eligible for R&D tax credits and you could claim up to 33.35% of your research and development costs.
Contents
- What are R&D tax credits?
- How do R&D tax credits work?
- Is my business eligible for R&D tax credits?
- Who qualifies for R&D tax credits?
- What counts as R&D?
- What costs qualify for R&D tax credits?
- What R&D tax credit incentive is right for my business?
- How much is an R&D tax credit claim worth?
- R&D tax credit rates
- What’s the process to claim R&D tax credits?
What are R&D tax credits?
Aimed at inspiring innovation and investment in R&D, r and d tax credits are available to companies operating in the UK. It’s one of the UK government’s key incentives and offers up to 33.35% of a company’s R&D spend to be recouped against their Corporate Tax bill or as a cash repayment.
The UK government paid back a staggering £7.4 billion in tax relief in 2020 and this figure had been continually increasing each year.
How do R&D tax credits work?
When businesses invest in developing new digital products and services, or upgrade existing processes, they become eligible for R&D tax relief.
The relief can be claimed back in the form of a reduction in Corporation Tax or as a cash payment. The scheme can be applied to almost every industry and sector, and you can even make backdated claims for the previous two accounting periods.
Is my business eligible for R&D tax credits?
The are a few requirements to benefit from a R&D tax credit claim:
- You must have undertaken research and development activities
- You must have invested funds into these projects
- And you must be a UK limited company and subject to Corporation Tax
Who qualifies for R&D tax credits?
Research and development is not limited to a specific industry or sector. You can make a r&d tax credit claim for any business type – from manufacturing, eCommerce and Healthcare, all can benefit from the scheme, as long as you are:
- Developing new products, services or processes
- Upgrading or modifying existing products, services or processes
What counts as R&D?
The criteria set by the UK government is broad. As we have mentioned before, there are no limitations on sector or type of business. As long as you are investing in research and development and trying to solve a problem with new technology you qualify,
It’s also worth mentioning that with the government’s accepted research and development definition, your project does not have to be successful to qualify.
What costs qualify for R&D tax credits?
Some of the different costs that qualify for r and d tax credits include:
- Employees – including salaries, employer’s NIC, pension contributions and relevant expenses
- Freelancers and subcontractors – Any materials or consumables including utilities e.g. heating, lighting/power, that are used to complete the project
- Agency workers
- Software licences
What R&D tax credit incentive is right for my business?
Your R&D tax credit claim will mainly depend on your business size – whether you are an SME or a large company.
If you are a SME (including start-ups) – Up to 500 employees and either less than €100 million turnover or €86 million gross assets. Most companies (including start-ups), fall into this category.
If you are a Large company – Over 500 employees and either over €100 million turnover or €86 million gross assets.
How much is an R&D tax credit claim worth?
R&D tax credits are calculated on your total projects R&D spend. You’ll need to itemise all qualifying R&D expenditure to maximise your claim.
When you deduct your R&D expenditure from your taxable profits, or add it to your loss, you will either receive::
- a reduction on your Corporation Tax bill (if you are profit-making)
- a credit (if you are loss-making)
- or a combination of the above
R&D tax credit rates
SMEs can claim up to 33p for every £1 spent on eligible R&D activities. The average claim made by SMEs in 2018-2019 was around £57,000.
Large companies can claim up to 11p for every £1 spent on R&D activities. The average claim made by large companies in 2018-2019 was around £630,000.
What’s the process to claim R&D tax credits?
You can make a r and d tax credits claim for your previous two accounting periods through HMRC. Although not a legal requirement, a R&D report should be created explaining the technical advancement as well as detailing the eligible expenditure that is being claimed for each project.
We recommend speaking to your accountant about your eligibility, the process of making a claim and how to make the most of your entitlement.