Many people have heard of R&D Tax Credits, but often don't fully understand how the scheme works and what the process involves.
To change this, and help more businesses supercharge their cashflow through R&D Tax Relief, we’re going to answer the frequently-asked question – how do R&D Tax Credits work?
💡 What are R&D Tax Credits?
The R and D Tax Credits scheme was introduced by the UK government in 2000 to fuel innovation by offering financial support to businesses.
If a business is conducting R&D to bring a new product, process, or service to market (or improve existing offerings), they can reclaim up to 27% of the money they’ve spent in the process (across the past financial year) by submitting an r & d tax credit claim.*
To break down the question of ‘how do R&D Tax Credits work?’, the simplest route to take is explaining what R&D Tax credits offer, and which types of businesses can make an r & d tax credit claim.
A specific figure for how much you can claim under R&D Tax Credits is determined by three metrics that relate to the size of your business.
Businesses with less than 500 employees, that are turning over less than €100M, and have less than €86M in gross assets can reclaim up to 27% of R&D expenditure - if they are loss-making. Profit-making SMEs in this category can reclaim up to 21.5% of R&D expenditure.
In these two scenarios, the R&D Tax Credit claim would fall under the SME R&D Tax Credit scheme.
Businesses that have over 500 employees, greater turnover than €100M, and more than €86M in gross assets can reclaim a fixed rate of 20% of R&D expenditure, regardless of whether they are profit or loss-making.
Unlike r & d claims made under the SME scheme, this percentage is subject to corporation tax – reducing it to around 15%. R and D tax credit claims of this type comprise the RDEC R&D Tax Credit scheme.
Additionally, financial aid through research and development tax credits is provided in two different ways.
Loss-making businesses that file under the SME R&D Tax Credit scheme receive their claim benefit in cash, deposited directly into their bank account from HMRC.
Alternatively, profitable businesses that file an r & d tax credit claim under the SME scheme receive their claim benefit as a corporation tax deduction off current or future liabilities (hence the name ‘R&D Tax Credits’). All claims made under the RDEC R&D Tax Relief scheme are also delivered through a corporation tax deduction.
💡 Which costs can be reclaimed through R&D Tax Credits?
Now that we’ve explained how HMRC determines the size of your R & D Tax Credit claim, and in what form you can expect to receive the benefit, you might be wondering what exactly constitutes ‘R&D expenditure’.
Qualifying R&D expenditure that can be claimed under research and development tax credits is as follows:
Staffing costs – This can include gross salaries (wages, overtime pay, and cash bonuses); employer NI contributions; employer pension contributions; certain reimbursed business expenses.
Subcontracted R&D – For SME R&D Tax Relief, you can include 65% of payments made to unconnected parties. For RDEC R&D Tax claims, there are a set of conditions your subcontractor must fit to make this expenditure claimable.
Externally Provided Workers (EPWs) – costs incurred from contractors, freelance workers, and agency staff.
Consumables – costs incurred from materials that were consumed or transformed along the course of your research and development, from water and fabrics to fuel and power.
Software – costs incurred from computer software licence agreements.
Payments to the subjects of clinical trials – a self-explanatory area of spending, exclusive to MedTech and HealthTech businesses.
For a more detailed explanation of which costs qualify for R&D Tax Relief, check out our separate blog.
💡 What’s involved in the process of claiming R and D Tax Credits?
If you work with a Specialist R&D Advisor such as Claim Capital, claiming research and development tax credits requires very little work on your end.
All we need from our clients is to be briefed on their R&D activity and supplied with relevant financial and technical information. Once we receive these, your job is complete!
From there, our R&D experts take over. We analyse your financial and technical data to complete two core components of the R & D claim – the financial and technical reports.
The financial report sets out your claimable R&D expenditure in an itemised breakdown of qualifying costs. This report details how much Research and Development Tax Relief your business is entitled to, for the past financial period.
The technical report serves the function of proving that the activity laid out in the financial report is, in fact, R&D. This involves showcasing how your R&D activity worked to overcome technological or scientific uncertainty and demonstrated innovation. This is where a high-level understanding of Research & Development tax credits is crucial – R&D specialists are able to recover niche areas of R&D spending that accountants miss.
To learn more about what’s included in the technical report, read our specialised blog.
If your R&D Advisor is HMRC-authorised (we are!), the process is further streamlined as they can submit your R & D tax credit claim to HMRC on your behalf.
Then, your r & d claim is in the hands of HMRC inspectors. Once submitted, you should receive your R & D Tax Credit claim within 4-6 weeks.
One of the most reassuring parts of the R & D claim process with Claim Capital is our success-based fixed fee.
We charge a £3,000 fixed fee that’s only ever paid once you receive your R&D tax relief from HRMC.
Traditional R&D Advisors charge companies 10-30% of their R & D claim return. We don’t think this is justifiable. Our fixed fee allows our clients to save thousands – and keep hold of more money as their r & d claim size grows over time.
Nearly all of our clients that start claiming R and D Tax Credits soon find that their R&D claims become an integral part of their yearly cashflow – whether it be in cash, or money saved on corporation tax that can now be spent elsewhere.
There’s no limit to how many times you can claim research and development tax credits. You can claim year after year, right up until your research and development is complete. And should you decide to pursue another R&D project, you can claim for that too.
If you were wondering how research and development tax credits work, we hope this blog has offered a clear picture of the scheme, and how UK businesses can benefit from it.
By spreading the word about how R&D Tax Credits work, we hope to open more eligible businesses up to the possibility of claiming, and secure greater funding for meaningful innovation.
To explore whether your business is eligible to claim R&D Tax Credits, or to let Claim Capital optimise your R & D tax credit claim, get in contact with our team.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.