R&D tax credits were first introduced in 2000 at a relatively low level but in recent years the rates have increased significantly to incentivise companies to claim. The Government objective is to use tax incentives to encourage technical firms to invest in developing their own innovative products, and make the UK more competitive in the global market.
HMRC figures published in August 2014 showed:
- Since the R&D tax credit schemes were launched in 2000‐01 up until 2012‐13, over 100,000 claims had been made and more than £9.5 billion in tax relief claimed.
- By the end of 2012‐13, more than 28,500 different companies had made claims under the SME scheme since it began in 2000‐01, and over 7,000 under the large company scheme, which launched in 2002‐03.
- The total number of claims rose to 15,930 for accounting periods ending in 2012‐13 an increase of 26% compared to 2011‐12
What Are R&D Tax Credits
If a company is taking a risk by innovating, improving or developing a process, product or service, then it can qualify for R&D tax credits. They can apply even if company has not made a profit.
The tax credit allows companies to deduct up to 225% of qualifying R&D expenditure when calculating their profit for tax purposes. The tax deduction is usually claimed against corporation tax but in certain circumstances SME’s can surrender a tax loss to claim a cash payment. This can be a valuable source of revenue for early stage technical companies.
How they work
R&D Tax Credits work by reducing taxable profit (sometimes, all the way into a tax loss) and thereby reducing Corporation Tax. However, even if little (or no) Corporation Tax is owed the scheme can deliver cash in exchange for surrendering some of the tax loss.
As an example, if an SME incurs expenditure of £100,000 on qualifying R&D (see below), it can deduct £225,000 when calculating its taxable profit for corporation tax purposes. The £100,000 will be accounted for so the balance of £125,000 would be an additional deduction from the taxable profit giving a tax saving of £25,000 (at a Corporation Tax rate of 20%).
It is often possible to make retrospective claims but the tax credit is only useable after finishing at least one accounting year.
How to qualify
One of the greatest hurdles when considering whether to file R&D Tax Credits is figuring out if the business qualifies The answer is not straightforward and it is always best to ask a specialist (disclaimer – we are not that specialist)
HMRC do (in principle) offer advice but unless the case is straightforward the advice can be contradictory and the response can be simply ‘submit and we will evaluate’. The two key criteria in determining who is eligible for R&D tax credits are ‘innovation’ and ‘uncertainty’.
If the R&D is associated with something that has been done many times and is common knowledge it is highly unlikely to qualify. However, if it involves uncertainty as to whether the desired outcome or new product could be achieved and there are technical aspects to be explored and overcome then it is probably a qualifying project. In many cases this still applies if the project is ultimately unsuccessful.
The value of the project is also a key consideration. If it is less than GBP(£)5K then it is unlikely to qualify but once in excess of GBP(£) 25K there is more chance of success.
Although the latest HMRC figures (above) show an increased take up in R&D tax credits they are still under used as a source of valuable revenue to technology start-ups and to reduce the tax liability of larger organisations. They are worth evaluating with the help of qualified specialists.