Introduction to R&D tax credits
What are R&D tax credits?
The UK government’s R&D tax credits scheme is designed to stimulate innovation in the UK economy. The program provides UK businesses with either a cash credit or corporation tax deduction to compensate for up to 33% of the cost of their research and development.
The scheme is available to businesses in all sectors, as long as your activity counts as R&D. So if you’re developing new products, services, or processes; or modifying old ones, then you may be able to make a claim.
Am I eligible to claim R&D tax credits?
R&D tax credits are available to limited companies in the UK who undertake research and development projects.
What counts as an R&D project is often debated amongst R&D claims advisors. At EmpowerRD we apply the following three criteria to get an initial indication of whether a project could qualify as R&D or not.
CRITERION 1 Overcoming uncertainty
If the outcome of the project was a foregone conclusion, it probably won’t qualify as R&D. The project should aim to overcome some form of scientific or technological uncertainty.
CRITERION 2 Advance in its field
The R&D project should aim towards a genuine innovation that hasn’t been seen elsewhere. The new or modified product, service or process should be an advance in its field.
CRITERION 3 Requiring competent professionals
The R&D should be carried out by competent professionals as that indicates that the advance was challenging to achieve. An example of a competent professional could be an engineer, scientist or skilled craftsman.
Which costs qualify for R&D tax credits?
While you may have undertaken activities that qualify as R&D, you’ll still need to know which costs can be claimed for.
Identifying R&D costs can be difficult, but the main ones you’ll likely claim for are:
Staff
The wages and some other staff costs associated with the employees undertaking R&D.
Subcontractors
Subcontractors and consultants are often involved with R&D. You can claim back part of their cost.
Consumables
Items that are used up by the R&D process like chemicals, building materials, heat, light and power.
EmpowerRD recommends
There are many more types of R&D costs that you can claim for. We recommend reading our qualifying costs guide before identifying your own costs.
When we reviewed a past claim for one of our clients we were able to identify three times more qualifying costs than their previous advisor had done. That example goes to show how difficult and complex the process of identifying costs is. Even traditional advisors make mistakes and undervalue a claim.
How much R&D tax credit can I claim?
Company Size
If you’re a company with fewer than 500 staff, and a turnover of under €100m or a balance sheet total under €86m, then you can likely claim through the SME scheme. If your company exceeds those limits then you should claim using the RDEC scheme. Read more about the differences in the schemes here.
Financial Positions
The amount of credit your receive through the SME scheme depends on your profitability. With the RDEC scheme, your profitability doesn’t affect the credit you’ll receive.
| SME Scheme | RDEC Scheme | |
|---|---|---|
| A loss-making SME | Up to 33% | 13% |
| A profit-making SME | Up to 25% | 13% |
| An SME breaking even | Up to 18% | 13% |
| A large company | N/A | 13% |
Exceptions
If your SME has received grant funding then it may mean you need to claim through the RDEC scheme. Although this depends on the nature of the grant. Read our in-depth guide to grant funding and R&D claims to find out more.
Claim Amount
In 2019-20 the average UK SME claim was £57,228 and RDEC claim was £332,160. Each year the average value of claims tend to increase.
How to make an R&D tax credit claim
Self-file
Methodology
Build and submit the claim yourself
Expertise
Requires R&D credit expertise in your business
Typical claim duration
Varies
Price
Varies
Suitable for claims
Up to £50k costs
Accountant
Methodology
Typically a pre-built template or questionnaire
Expertise
Low level of expertise
Typical claim duration
2-3 months
Price
Varies
Suitable for claims
Up to £50k costs
Traditional Advisor
Methodology
Phone interviews and email chains. Or an in-person business visit.
Expertise
Mixed levels of expertise
Typical claim duration
1-2 months
Price
10-33%
Suitable for claims
Varies
EmpowerRD
Methodology
Advisors available over phone, email and live chat. Online data collection 24/7.
Expertise
Ex-HMRC inspectors and senior R&D claims assessors
Typical claim duration
1-2 weeks
Price
5% or less
Suitable for claims
Over £50k costs
EmpowerRD recommends
We recommend using an accountant or self-filing if you’ve spent less than £50k on research & development in the past financial year. The government publishes a short guide for small companies to self-file here.
If you’ve spent more than £50k we recommend speaking with one of our advisors about your claim process. At that level and beyond, identifying your costs will become more complex, and HMRC will begin to apply more scrutiny to your claim.
It’s also worth noting that if this is your first time making a claim for research and development tax relief then you can claim for your last two accounting periods.
How long does it take to receive the funds?
HMRC commit to a payout SLA of 28 days for both SME and RDEC claims.
However, our 2019 data showed an average payout wait of 47 days for our clients. In some cases, we saw payouts taking up to 4 months before being received. We publish the most up-to-date payout estimates on our HMRC payouts status page.
If you want to avoid the uncertainty of not knowing when your money will arrive from HMRC, or if you need funds right away, we recommend choosing R&D advance funding.
With R&D advance funding you can receive up to 80% of your R&D tax relief up to 6 months before you file your claim, helping you plan your cash flow accordingly and reinvest the funds back into your business sooner.
To learn more about how R&D advance funding works, read our guide on R&D advance funding.
The benefits of R&D tax credits
We have seen businesses transformed by the research and development expenditure credit they receive. It often provides an essential stepping stone to promote further growth, investment and profitability.
The most recent study by the government indicates that for every £1 spent on the R&D tax credit claims, an additional £2 of R&D expenditure is generated in the economy. So the tax incentive continues to be a successful driver of UK competitiveness.
If you have any further questions about the scheme then be sure to check our FAQ here. Or get in touch with one of our advisors.
About EmpowerRD
We’ve radically improved the process of making an R&D tax credit claim.
At EmpowerRD we employ industry-leading R&D claims advisors and ex-HMRC inspectors to assess your claim and help you identify your costs, while also providing an intelligent online platform to help you to co-ordinate the claim amongst your team. Read about the benefits of using EmpowerRD in our case studies.
If you’re an SME and claiming back on more than £50k of costs, or you’re applying through the RDEC scheme, then it makes sense to use EmpowerRD for your claim.
Book a call for a time that suits you, or complete the form below and one of our experts will be in touch shortly.