Research and development tax reliefs are a UK government policy that is designed to encourage businesses to innovate, develop new products and services, create jobs and invest in R&D activities while facing less risk.

This post will give you everything you need to know about claiming Research & Development Tax Reliefs as a small business owner!

What are research and development (R&D) reliefs?

The Research and development (R&D) reliefs allow businesses to claim Corporation Tax relief on research and development activities.

Research and development is a key driver of economic growth, supporting employment and the creation of new products, processes or services that meet specific customer needs.

The R&D Reliefs are available for both SMEs (Small to Medium-sized Enterprises) as well as large companies undertaking research & development in the UK.

What counts as an R&D project?

Work that you do to develop a new or improved product, process or service can qualify for Research and Development (R&D) tax relief.

This includes activities such as:

• Researching what is currently available on the market

• Developing prototypes

• Testing products or processes

• Investigating alternatives to existing products or processes

• Researching market trends

What doesn’t count as an R&D project?

Activities that don’t qualify for relief include:

• The design of products or processes that are essentially the same as those already on the market

• Activities that are routine or fundamental to your business, such as quality control or testing

• Researching customer preferences, which is known as market research. This could be considered to be part of your everyday marketing activities

• Researching developments in your own field

Justifying a project as R&D

To qualify for Research and Development (R&D) tax reliefs, your project must meet certain criteria. The main one is that the activities you’re carrying out must be aimed at improving your business or its products or processes.

To get R&D relief you need to explain how a project:

• Looked for an advance in science and technology

• Had to overcome uncertainty

• Tried to overcome this uncertainty

• Could not be easily worked out by a professional in the field

Your project may look at or create a new method, product, or service, as well as improve on an established one.

You must also demonstrate that you are progressing in your field, that a specialist in the field could not have solved it, where there was uncertainty, and how you attempted to overcome it.

What tax reliefs are available?

The R&D Tax Relief covers qualifying expenditure on the following:

• Research and development services, including activities such as engineering, design or consultancy that have a direct bearing on R&D carried out by you. The organisation providing these services must be registered with HMRC for research and development

• Staff costs, including wages of employees, directly working on the R&D project. This also includes salary sacrificed in return for shares or share options given to employees who are working on the R&D project

• Materials and consumables used in carrying out the research or development work

• Software, including licences, that is used in the development of new or improved products or processes

• Certain capital items used in research and development work. This includes prototypes, models and test equipment designed specifically for use in research and development

• Buildings, machinery and equipment that are used only to carry out r&d work. Research or development costs can include vat incurred on the purchase of assets but this cannot be reclaimed separately under the rules

• Demonstration models fitted with working prototypes if they have been designed specifically for use in carrying out research and development work. Research or development costs can include vat incurred on the purchase of assets but this cannot be reclaimed separately under the rules

Types of R&D relief

There are several types of R&D relief for different sizes of companies, including:

SME R&D relief

To claim Small and medium-sized enterprises (SME) R&D relief, you must show that you’re undertaking Research and Development activities and are:

• A company with less than 500 staff

• A company with a turnover of under 100 million euros or a balance sheet total under 86 million euros.

If successful, you will be able to:

• Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction

• Claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss

Research and Development Expenditure Credit (RDEC)

Larger companies (with over 500 staff) can also access Research and Development tax relief but through the government’s enhanced Research and Development Expenditure Credit (RDEC) scheme.

The RDEC offers a higher rate of relief – 13% of qualifying costs – than the SME R&D relief and is available to companies with a turnover of over 100 million euros.

Applying for R&D tax reliefs

When it comes to applying for R&D tax reliefs, there is no one-size-fits-all solution.

You will need to work out which scheme is most applicable to your business and then follow the specific application process.

For help with this, you can contact an accountant or R&D tax relief specialist like Drop.

 

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