R&D Tax Credits

When it comes to Research and Development tax, it’s crucial that UK companies understand how to use them to change their business for the better. Here, we will explain what R&D tax credits are, how to claim R&D tax back, and why Research and Development tax is so beneficial in the UK.

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What are R&D tax credits?

Let’s start with the basics: R&D tax credits allow companies in the UK to get a deduction on their corporate tax from HMRC. These R&D tax credits are only available to businesses that have expenditures in the development of products, software, processes, or other services.

By using an accountant – like those of us here at Wizz Accounting – you can ensure that you’re getting the highest amount for your company when you claim R&D tax back from HMRC. Otherwise, you may not have a maximised R&D claim.

R&D tax credits are invaluable. An R&D claim would allow your corporation to gain revenue that they wouldn’t have had, which then allows you to continue investing into your business. With a decent R&D claim, any UK business could find themselves with some extra cash to invest back into their growth.

That means potentially hiring another employee, pushing your research and development work further than you could before, or even renting out some more space. On a smaller scale, it could just end up being better office chairs or a holiday bonus for your hard-working staff members.

What you do when your claim R&D tax back is up to you and any shareholders in your company. But to get you there, you will need a steady accountant who can help you through the process.

R&D tax back eligibility

It’s time to start investing in your company and its future.

Any company that spends some of their finances in development will be eligible to claim R&D tax back. In terms of what you can develop, well – as long as you’re developing some kind of new product, a process, or developing a service, you should be eligible.

Here is our quick eligibility checklist to help you figure out whether you might be eligible for a R&D claim:

  • You have a limited company that is based in and operates in the UK.
  • That company is subject to corporation tax.
  • You have worked on research and development projects that are qualified for R&D tax credits.
  • You have spent company finances on those projects.

Still unsure whether or not your company qualifies? You would be surprised how many different sectors have R&D companies that are eligible for R&D tax credits. Everything from cosmetics to mechanical engineering has the potential to claim. And we’re not saying that a section outside of those wouldn’t be able to – they’re just our examples.

Aerospace companies with R&D projects can claim, so can construction companies, telecommunication companies, breweries, and even the food & beverage industry.

It’s less about what sector your company works in and more about how your company has elevated the research and development of that sector.

What the government counts as R&D

Here’s the fun part: The way that the government define R&D is very broad. You could so easily be involved in research and development without taking huge or expensive steps with your corporation.

All you need to be doing, as a business, is resolving either scientific or technology-related uncertainties and be taking a risk (usually a financial one) by doing so. You must either be creating new products, services, or processes as a result of this, or be changing an existing one.

In the event that you are uncertain if your attempt at creating or changing a product, service, or process will work, you must (at least) be trying to complete what you set out to do. You do not have to have any successes in your research and development to be eligible for research and development tax credits.

Where there is no current solution, or you believe that your corporation has the means to change the solution, the government would recognise your product as research and development.

R&D can be completed by your company for itself or for a client, both instances would qualify. Research and development beings for your company when you decide to try and resolve any uncertainties that are scientific or technological in nature. First, there is the generation of an idea, then how feasible it is. Next is the planning stage, which gives way to design and building. Finally, you would test your project and its thesis.

Once you find out the answer to your original uncertainties, you can consider the project and its questions resolved. Then, if applicable, the project’s outcome could be launched.

Even in the event of failure, this process is still research and development, and that is what makes a corporation eligible to claim R&D tax back.

What you can claim back

Once you know whether or not you’re eligible to claim R&D tax back, it’s good to know what you can actually get.

There are several ways to get a pay out from your R&D tax credits, but what and how you will receive your research and development tax back depends entirely on your tax scheme.

There are two major tax schemes for corporations that are involved in research and development. These are the SME R&D tax credit scheme (Small to Medium Enterprise Research and Development tax credit scheme) and the RDEC scheme (Research and Development Expenditure Credit scheme).

SME R&D tax credit scheme

For small to medium businesses under this tax credit scheme for their research and development endeavours, there are a total of five different ways that you can receive your pay out.

Tax refund

Research and development tax credits that can be claimed from the last two accounting periods. HMRC will give your business their tax refund as standard if you claim after a period that you have already paid tax for. This is similar to tax refunds for any average person looking at their annual taxes.

Tax relief

Provided that you make your research and development tax claim during the same annual period that you send in your corporation’s tax return, you may receive a reduction on your corporation’s tax for that period, rather than a refund. It’s better to explore this option when your corporation is making profit, rather than making a loss.

Loss relief

Somewhat opposite to the above, this option is better when your corporation is making a loss from R&D. After sending in your R&D tax credit claim, you can then carry that loss to the year before if you had made some profit during that period. You can also carry the loss forward, which is usually a better option.

Cash payment

A secondary option for corporations with R&D financial losses, you can surrender your losses and get cash credit from HMRC.

Combined outcome

The final option is to combine the different outcomes to better suit your corporation and its financial state after R&D. If you want to explore this option, it’s best to have a fully trained accountant with experience in R&D tax credit claims. Such as those of us here at Wizz Accounting.

RDEC scheme

There is a more complicated seven-step process for claiming R&D tax credit under the RDEC scheme. Corporations under this scheme would benefit from the support of an accountant because the scheme is aimed at companies which frequently invest in research and development, and would, therefore, need more involved help from one of our Wizz Accounting experts.

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