Various incentive schemes exist to encourage UK companies to invest in innovation, including R&D Tax Credits. HMRC estimates that for every £1 forgone in tax, through Research and Development Tax Credits, £1.53–£2.35 is stimulated in R&D spend by UK companies.
What are R&D Tax Credits?
Research and Development Tax Relief schemes were introduced by the British government in 2000 for Small and Medium Enterprises and in 2002 for Large Companies with the primary goal of rewarding the companies operating within the UK and concentrating on investing in innovation.
You might wonder why the government would design an incentive scheme purely for those who work and contribute to innovation. The answer is, in fact, quite simple: innovation is one of the most important drivers of the economy, stimulating jobs and skill creation.
Innovation helps businesses grow and subsequently take on more challenging projects. New projects often require new professionals, potentially from other industries, and create more job openings. These new professionals generate more income for their employers, and their taxes also contribute to the UK economy.
By encouraging companies to undertake innovative work, the UK government ensures growth in employment, stable tax repayments, and contributions to research and development activities.
How do R&D Tax Credits work?
When the company spends money on innovation, whether it is developing something new or improving an existing product, process, or service, it becomes a potential candidate for either a cash rebate or a reduction of the Corporation Tax paid (subject to the company’s financial position).
However, before the benefit can be estimated and received, chosen projects must undergo an assessment to help HMRC understand if those activities can be considered innovative rather than just complex.
It’s also worth mentioning that the scope for qualifying projects under the R&D tax relief schemes can only be applied to the last two years (due to the regulations around the time given to submit and amend the tax computation).
For small and medium enterprises (SMEs): The R&D incentive comes in the form of a Corporation Tax (CT) tax relief that can reduce a company’s tax bill if liable for CT or result in a payable tax credit.
For large companies: The incentive is called Research and Development Expenditure Credit (RDEC), an above-the-line credit. It can either reduce their tax bill or allow them to claim a payable cash credit.
What counts as R&D?
The definition of R&D for tax purposes is much broader than you might think. Some of the daily challenges you face could likely qualify as eligible expenditure.
For the government to recognise activity as innovative and therefore eligible for R&D Tax Relief, it has to match certain criteria. For that reason, HMRC has defined three main points that must be satisfied for the project to be deemed eligible:
- The activities undertaken during the project must be within a particular sector. It can be anything, starting from manufacturing and process engineering all the way to oil and gas, food processing, and software engineering.
- This project’s end goal should be an advance within that sector, such as:
- developing something completely new,
- appreciably improving the existing product, process, or service,
- or duplicating it.
- The project needs to have an element of technological or scientific uncertainty. This uncertainty could be due to various challenges like infrastructural constraints, architectural challenges, cost constraints, industry-related trends, etc.
The rules and guidelines governing this niche area of tax are complex. By working with your finance and technical teams, we will identify all qualifying activity throughout your business. Each of our consultants has an in-depth understanding of R&D tax legislation, and your Ayming delivery team will include consultants with real-world industry experience. This combination of tax and technical knowledge is integral to maximising our clients’ R&D incentive claims.
What businesses can claim R&D tax credits?
There are some simple and relatively straightforward rules when it comes to identifying a company's eligibility for R&D Tax Credit:
- You must be a limited company in the UK and be subject to Corporation Tax.
- You must carry out qualifying research and development activities (those that match the three criteria mentioned above).
- There should be expenditure recognised with its financial statements on those activities.
R&D tax credit rates
SME R&D Tax Credits explained
As an SME, you can claim up to 27p for every £1 of qualifying spending. The exact percentage depends on the company’s financial position, i.e., profit or loss-making, and R&D intensity.
Here are the options:
- If you make a profit per accounting period in question, your benefit will be up to 21.5p per every £1 of qualifying expenditure.
- If you include the R&D benefit in your initial submission of Tax return, it will reduce the tax payable.
- If you are amending your already-submitted numbers, then you will receive a cash credit.
- If you are a loss-making entity, you could claim back up to 18.5p for every £1 of qualifying expenditure. You can realise the benefit in four ways:
- Surrender the loss for cash tax credit at a rate of 10%
- Carry back and offset against prior years’ profits (to assist struggling businesses, the Government has now extended the carryback period for tax purposes from 1 year to 3 years for the claims between 1st April 2020 – 31st March 2022)
- Carry forward and offset against future profits
- Surrender it for group relief
- Loss-making entities that have a high R&D intensity (40% or above of their expenditure is spent on R&D) are eligible for a higher payable credit rate of 14.5%. An R&D-intensive entity could therefore claim up to 27p in every £1 of qualifying expenditure.
Large company R&D tax credits explained
Large companies can claim up to 15p for every £1 of qualifying spend.
- The RDEC scheme follows “above the line” treatment, and so R&D benefit is recognised as gross credit in “other income” in the income statement
- Like the SME scheme, you can either receive a benefit by stating an accurate figure in your initial submission of the accounts or include it in the adjusted accounts for a cash rebate.
Research and Development Allowances (RDAs) explained
Research and development allowances (“RDAs”) allow you to claim a 100% first-year allowance on R&D capital expenditure. This is significantly more generous than most other types of capital allowance.
If you are carrying out qualifying R&D activities, you have likely incurred some capital expenditure. This activity would qualify for RDAs.
R&D allowances are based on the same definition of R&D as the R&D tax credit schemes. We recommend that you review your eligibility for RDAs in conjunction with the R&D tax schemes.
What is HMRC’s processing and repayment time?
If you are claiming under the SME scheme, HMRC aims to make a payment to your specified account within 40 days. You should allow another ten days for the money to reach your bank account once the R&D claim is approved.
Overall, it takes approximately 48 days from the submission of the claim for the money to reach your account. (In our Rapid Claims process, we can expedite this process, and you can receive payment within seven days in certain circumstances!)
Large companies, however, might have to wait slightly longer. This is usually due to their Corporation Tax returns being more complex than those of SMEs. The processing time can also be affected by additional specialist areas, such as transfer pricing.
How far back can you claim?
To answer this question, we should think about accounting regulations. Each company has 12 months after the end of their accounting period to file their tax return. Moreover, you also have another 12 months to amend the return. Therefore, there is a two-year period within which we can look at the undertaken project and assess its eligibility as R&D.
However, for accounting periods beginning on or after 1 April 2023, you must submit a claim notification form if you are claiming for the first time, or if the last claim was made more than 3 years before the last date of the claim notification period. This must be submitted within six months after the end of the accounting period.
Are R&D tax benefits taxable?
The short answer is yes, but only if you are a large company. SMEs claim their credit as “below the line” which means after the tax payable has been calculated. However, large companies have to include the R&D tax benefit before the tax calculation, so the benefit is taxable.
When were R&D tax credits introduced?
The original guidance on research and development for tax purposes appeared in 2000. The R&D tax relief scheme for SMEs was launched in the same year.
The R&D capital allowances scheme followed in 2001, which focused on providing relief for capital expenditure on R&D.
The Large Company Scheme was introduced in 2002 but discontinued in 2016 as it was replaced by the RDEC scheme which launched in 2013.
Are R&D tax credits de minimis state aid?
De minimis state aid is “state aid” that is given in relatively small amounts and is exempt from the notification and approval requirements of the European Union (EU) and the United Kingdom (UK).
The SME R&D Tax Relief Scheme is classified as Notified State Aid and therefore is not a de minimis state aid, meaning the SME company that has a project entirely or partially funded by notified state aid grant cannot claim SME R&D tax relief. The RDEC scheme, however, can still be claimed even with the funding.
Where an SME receives de minimis state aid, only a proportion of the funded project should go through the RDEC scheme. The remainder will be claimed using the SME scheme.
Can charities claim R&D tax credits?
As charities do not pay Corporation Tax, they do not qualify for R&D tax relief.
However, from 2013 to 2015, HMRC allowed non-profitable organisations to claim under the RDEC scheme. It discontinued the relief eight years ago as the government concentrated primarily on supporting business growth. It is worth noting that the relief is still available for subcontractors and split-off companies; therefore, the amendment is only relevant to charities’ own research and development work.
Is R&D tax credit refundable?
R&D Tax Credit will be fully refundable if the company chooses to surrender the losses and claim the tax refund. This way, the company can see the immediate effect of the R&D tax benefit scheme. Another option for the company would be not to surrender the losses but to carry them back or forward to offset past or future profits. This approach takes longer for the benefit to be realised but might be a more beneficial decision for the company, depending on its financial position.
When are R&D tax benefits paid?
HMRC aims to make a payment within 40 days of the submission of the R&D claim by SME. It then takes up to 10 days for the money to arrive at the designated bank account. Tax refunds caused by losses carried back or forward might require an HMRC inspector’s manual intervention, as automated systems used for Corporation Tax (CT) refunds sometimes fail to recognise them.
It usually takes longer than that for large companies due to the greater complexity of their business and tax requirements.
Generally, during peak times (March, September, and December), the processing time is slightly longer due to the volume of payments needing to be processed.