The Government’s R&D Tax Credit scheme, an extremely successful initiative that has been running for the past two decades, is open to any company investing time and money in new products or processes that meet HMRC’s definition of R&D.
Research and development (R&D) Tax Credits represent a generous government tax relief incentive, as firms can claim either a reduction in their limited company’s corporation tax bill, or a cash lump sum (depending on whether the company is profitable or loss making). The scheme allows any UK company investing in eligible innovation to claim up to 33p in every £1 of the qualifying costs back.
With the Brexit agreement now finalised and the current government keen to promote that the UK is open for business, R&D tax credits will play a crucial role throughout 2021 in demonstrating the UK’s thirst for innovation, assisting businesses to continue to innovate and grow. However, overall awareness for the relief continues to be low. There is still a large number of UK companies missing out on R&D tax credits, with potential magnitudes of tens of thousands of pounds, due to the common misconception that they simply do not qualify.
So, what projects and costs can be included in an R&D Tax Credits claim? Here we take a look.
How much a company can claim in R&D Tax Credits depends on a range of factors.
The relief itself is subdivided into two branches: the Small and Medium Enterprise (SME) branch and the Research and Development Expenditure Credit (RDEC). Which one to use depends mainly on turnover, headcount, and gross asset value, as well as whether the company has previously received any form of subsidisation or state aid grant for the same research.
How do I know if my project fits the criteria for R&D Tax Credits?
R&D is defined as “seeking an advance in technology or science” by “resolving a particular uncertainty”. Essentially, it’s about creating a new and innovative product, process or service, or modifying an existing one. There must be an element of demonstrable financial risk, and the uncertainty itself should not be easily solvable by a competent professional working in the field.
Importantly, if it’s unclear whether the project would be successful from the start, or whether it’s even possible, then it could well qualify for R&D Tax Credits. At this point we want to make clear that just because a project is challenging and complex, it doesn’t automatically mean it qualifies for R&D Tax Credits. The point is, there must be an unknown scientific or technological element to it. It should also be noted that the project does not have to be successful in order to qualify.
Can any company claim R&D Tax Credits?
Yes – the scheme is open to any UK company that’s subject to Corporation Tax (even if they made a loss).
Although R&D Tax Credits are offered regardless of sector or industry, some – like manufacturing, construction, pharmaceuticals and engineering – are more likely to be more prolific claimers than others.
Obviously we can’t go through every single sector and every single eligible project here, so below we’ve noted some key examples in the industries we’ve mentioned above.
Potentially eligible R&D projects in the construction industry
- Integrating new or improved technology into buildings
- Creating, or experimenting with, new materials
- Coming up with new ways to implement energy saving techniques
- Developing new or improved equipment used in construction
- Redesign work that seeks to enhance quality, performance, safety, reliability and life-cycle costs
Manufacturing and engineering projects
Common examples within the manufacturing and engineering sectors include:
- CAD design work involved in innovative product development
- Designing, constructing, and testing product prototypes
- Development of appreciably technologically improved products
- Increasing ease of operation or suitability of manufactured products
- Developing processes that would meet increasing regulatory requirements
- Designing innovative programmable logic controllers
- Streamlining manufacturing processes through automation
Healthcare and pharmaceuticals
This is one industry that immediately springs to mind when we think of R&D, with drugs and therapeutics being top of the list. Indeed, over our two decades working with pharmaceutical companies on their R&D Tax Credits claim, we’ve found that much of the qualifying work occurs during clinical trials.
Creating and upgrading medical devices and hardware is another common claiming area. This includes new technologies needed to administer drugs and to monitor patients.
Another key area that tends to attract R&D Tax Credits is the creation of new testing methods. Although it is widely believed that the relief can only be claimed on finished products, the fact is that R&D Tax Credits can also be pursued for work relating to the manufacturing and productions processes too. If new technology has had to be developed to make a drug, therapy or piece of equipment more effective or efficient, then R&D Tax Credits could well follow.
Finally, of course, there are other improvements in existing drug lines that can also attract R&D Tax Credits. This might be the development of a sugar-free drug for example or devising more sustainable or animal-free testing. As we’ve learnt from the recent Pfizer-BioNTech’s COVID-19 vaccine, there are always practical issues around drug logistics and storage where eligible R&D is required.
Identifying eligible costs
Again, this is rarely straightforward. The costs involved in each R&D project will be totally unique and it’s very easy to over or under claim.
The R&D tax legislation is very precise in what it deems as eligible costs, but it can be updated regularly and at short notice. As a guide, qualifying costs for R&D tax relief purposes are as follows:
- Staffing costs (salaries, wages, overtime, employer’s pension and NIC contributions etc.)
- Costs relating to Externally Provided Workers, freelancers and subcontractors
- License fees relating to software
- Consumables used up in the process of the R&D project itself, such as chemicals and prototyping materials, as well as power and utility costs.
It is important to note that as well as a great degree of specificity as to what costs are eligible, there is also a variation across the two separate R&D tax credit schemes, for example with subcontractor costs ineligible under the RDEC scheme.
EFMs R&D partner can support your claim
This article has been prepared in association with our R&D partner team. EFM can point you in the right direction to specialists who can guide you through the R&D claim process quickly and painlessly for the best chances of success.
All UK businesses should take full advantage of their R&D tax credit relief entitlements. If you think your business is entitled to R&D Tax Credits relief then please get in touch.
Contact our R&D partner team or call 01582 516300.