R&D tax credits: a brief guide
15th October 2012
R&D tax credits represent a key method for creative and digital businesses and other companies who invest in their ideas to access additional funding.
What are R&D tax credits?
R&D tax credits are the biggest single funding mechanism provided by the Government for investment in business research and development.
The credit is made available in one of two ways: either as a tax deduction based on R&D spending or it may be possible for certain loss-making small or medium sized companies (SMEs) to surrender their losses in return for a cash payment from Her Majesty’s Revenue and Customs (HMRC).
Who can claim the credits?
R&D tax credits are available to companies throughout the UK and across industry sectors. To be eligible to claim relief, a company must be undertaking qualifying R&D activities – details of which are covered below.
What activities or work qualify for the credits?
The Government’s basic definition for qualifying R&D is “work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology”.
Advances include new or improved products, processes and services. Broader innovation in products, processes and services (e.g. proprietary content, non-technical design or developing other non-technological unique selling points) isn’t R&D.
If it’s obvious to a professional how to do something, doing it isn’t R&D. If there is a ‘non-obvious’ scientific or technological problem around how to do something, then doing it is probably R&D. As a rule of thumb, developing information or other ‘content’ is not R&D, but developing the means to deliver ‘content’ can be R&D.
Further details on what the Government says is or isn’t R&D can be found at http://www.bis.gov.uk/policies/innovation/business-support/rd-tax-credits/tax-guidelines
I operate a small business and can’t afford to run a whole R&D department. Can I still get R&D tax credits?
All companies spending at least £10,000 in their accounting year on qualifying R&D are entitled to claim a deduction when calculating their taxable profits of 175% of qualifying expenditure for SMEs in respect of expenditure incurred on or after 1 August 2008 rising to 200% from April 2011 and 225% from April 2012 reducing the company’s UK corporation tax bill accordingly.
Alternatively, companies not in profit claiming under the SME scheme may be entitled to a cash payment worth 24.75 per cent of qualifying expenditure from April.
Are R&D tax credits only for smaller businesses?
No. For larger companies, the Government has introduced an Above The Line (ATL) credit, which will operate from 2013. Under the ATL scheme, the R&D tax credit will be accounted for as a reduction in the R&D spending of the company, not just reflected in the tax line of the accounts. The idea behind this is to increase the visibility and certainty of the R&D Tax Credit and making it more attractive to multinational investors.
The minimum rate of the ATL scheme will be 9.1% (before tax) and loss-making companies will be able to claim a payable tax credit.
I’m unsure as to whether my company is eligible for the SME scheme or the large company scheme. How can I find out?
To claim under the SME scheme for work undertaken before 1 August 2008 you must have fewer than 250 employees with either an annual turnover not exceeding €50m or a balance sheet totalling €43m, and not be part of a larger Enterprise that would fail these tests.
For work undertaken on/after 1 August 2008 the SME scheme is extended to companies with fewer than 500 employees which have an annual turnover not exceeding €100m and/or with an annual balance sheet total not exceeding €86m.
Other companies should apply for the large company scheme.
Can you only get tax credits for money spent on equipment?
No. Companies can claim R&D tax credits for their revenue expenditure on:
- employing staff directly and actively engaged in carrying out R&D
- paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D
- consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D)
- power, water, fuel and computer software used directly in carrying out R&D
Capital expenditure is not eligible – this may be covered by 100% capital allowances (Research & Development Allowances) instead.
Do many businesses take advantage of R&D tax credits?
Yes, plenty of companies do.
Over 10,290 claims were made during the year to 31 March 2011, for support totalling £1.1 billion, based on £10.9 billion of R&D expenditure.
How can I find out more?
As with any taxation issue, R&D tax credits will involve changes to the way in which your business’s tax affairs are handled so it is important you take professional advice before proceeding to make a claim.
However, businesses in the creative and digital sectors may be missing out on a valuable source of funding if they don’t consider the scheme.
If you think you may be eligible for R&D tax credits but would like to get more information on the scheme and how it could apply to your business, please get in touch.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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