Encouraging innovation is the primary purpose of the UK’s Research & Development (R&D) tax relief schemes. This is, in turn, part of the government’s goal of improving UK business productivity, performance, and competitiveness on the international stage. The government’s industrial strategy is to raise levels of R&D investment to be 2.7% of GDP by 2027, which requires increases in both public and private sector investment.
R&D tax relief provides incentives to boost investment in R&D work conducted by companies based in the UK. As a result, the schemes on offer are purposely attractive for innovative businesses across many disciplines. As your client’s accountant, it pays to know how they can benefit from R&D tax relief.
The incentives of R&D tax relief
The government has two schemes to encourage UK businesses to engage in innovative R&D work. The SME R&D tax relief scheme is open to businesses with fewer than 500 employees that have a turnover below €100 million, or a balance sheet worth less than €86 million. Meanwhile, the RDEC R&D tax relief scheme is open to all businesses bigger than this threshold. Both provide benefits in the form of a reduction in Corporation Tax. The maximum benefit that can be claimed through the SME scheme is 33% of the qualifying R&D costs; and through the RDEC scheme, it is 13%.
The SME scheme also includes the option for businesses to surrender their losses to obtain a cash credit. This is valued at 14.5% of the total loss surrendered. Whether or not this is the best course of action for your client will depend on a number of factors, which we discussed in our previous blog about The case for and against your client surrendering their losses for R&D tax credits.
The good news is that your client can still claim tax relief on qualifying R&D work even if the project goal has not been met. This is because HMRC understands that research and development is often a lengthy process and solutions to technical problems are not easily found. As a result, the risk that your client might usually associate with R&D work is lessened by the prospect of R&D tax relief. Risk often arises from the unpredictable nature of R&D work, and the process can spawn ideas that hit roadblocks, which may cost more than anticipated to resolve.
The benefits of R&D tax relief are extremely valuable for businesses as they provide an additional source of funding. Under the SME scheme, the tax reduction occurs below the line in your client’s accounts, whereas under the RDEC scheme, it is taxable income. In the latter case, you can therefore show the credit received as ‘other income’ to increase the value of your client’s profits before tax. This is optional though, so it is worth talking to your client about how they would like their tax credit to be treated.
Qualifying for R&D tax relief
To make R&D work as appealing as possible, HMRC offers R&D tax relief to businesses across all sectors. HMRC’s guidelines for qualifying R&D work reflect this, as they can be applied to all manner of projects. Here are the aspects of R&D work that can secure tax relief:
- It seeks a scientific or technological advance.
- It sought to, or did, overcome an uncertainty (a goal that has so far not been attainable by experts/technology previously developed).
- It contains work that could not easily be done by a professional in the field.
Note that a project can involve developing a process, product, or service that meets these definitions. It can also include modifications or changes made to existing processes, products, or services.
Related: Most common overlooked expenses when making an R&D tax claim
To be eligible for claiming R&D tax relief, the only requirement is that your client is a limited company based in the UK, which is subject to Corporation Tax.
What does the data say?
UK spending on R&D has been increasing steadily since the introduction of R&D tax credits in 2000, both in terms of the total spent and as a percentage of GDP. According to ONS research, R&D investment in 2000 was 1.59% of GDP and £442.20 per person. In 2019, it was 1.73% of GDP and £576.70 per head. Between 1985 and 2019, there was a 96% overall increase in the total spent. In the Autumn Budget, the chancellor confirmed that the government still aims to increase R&D investment as a percentage of GDP to 2.7% by 2027.
Related: The Autumn Budget 2021 and what it means for R&D tax credits
The government’s most recent evaluation of the RDEC, published in November 2020, estimates that for every £1 spent on R&D tax credits, between £2.4 – £2.7 is then invested in R&D by UK companies.
According to government statistics, there were just 1,860 total SME claims in the financial year 2000-1. In the period 2019-20, this figure is estimated to be 76,225. The R&D tax relief schemes have come a long way since their introduction. For example, when the SME scheme was first introduced there was a minimum spend of £25,000 per year for each accounting period. Now, there is no minimum spend. Furthermore, HMRC has streamlined their guidelines over time regarding key information, such as their definition of R&D. With the chancellor announcing in the budget that data and cloud computing costs (the tax definition of which has yet to be outlined) will be claimable for R&D tax credits, it would seem the range of qualifying R&D expenditure is likely to expand further in future.
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made.simplr’s online R&D tax credit management tool helps make the process of completing R&D tax credit claims straightforward. By making the benefits of R&D tax credits more accessible, we hope to aid you in upscaling and increasing the value and efficiency of your clients’ businesses.
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