R&D tax relief explained: Maximise your business's growth potential

DSA Prospect Research and Development Tax Relief: How to Maximise Your Business's Potential

Research and Development (R&D) is a vital component for businesses looking to stay competitive and innovative. It serves a two-fold purpose for organisations. Firstly, it enables them to create something unique that has market potential. Secondly, it may give them an edge over their competitors.

Despite being in place since 2000, many small and medium-sized enterprises (SMEs) are not taking advantage of the R&D tax relief scheme as they often believe it is only for larger businesses. However, SMEs can access a generous R&D tax relief program that could provide up to 33% of their qualifying costs.

The UK government is committed to promoting innovation among businesses, helping them succeed so that they can grow and compete internationally. As such, they are keen to invest in R&D projects and provide tax relief to eligible companies pursuing R&D initiatives.

Quick links: R&D tax relief explained

What is R&D Tax Relief and how does it work?

Am I eligible for Research and Development tax relief?

How much R&D tax relief can I claim?

What qualifies as R&D for tax relief purposes?

How do I claim R&D tax relief for my business?

What documentation do I need to support an R&D tax relief claim?

R&D Tax Relief provides cash incentives to companies by way of repayable credits or corporation tax reductions. This means that businesses can reduce their tax bill or even receive a cash payment from the government for their Research and Development activities. It's a win-win situation for businesses and the economy as a whole.

There are two main R&D tax relief schemes:

  1. The SME R&D tax credit for small and medium-sized enterprises
  2. The R&D expenditure credit for larger businesses

By investing in R&D, a business can come up with new and improved products, services, or processes that set them apart from the competition. This can lead to increased revenue, market share, and profits.

In addition, R&D can also help businesses solve problems and inefficiencies, reduce costs, and improve customer satisfaction. Overall, R&D is essential for any business looking to stay ahead of the curve and succeed in today's fast-paced and ever-changing business landscape.

The R&D process can be quite extensive and typically involves three key stages:

Idea generation Development and testing Commercialisation

Am I eligible for Research and Development tax relief?

Whether you're a start-up or a well-established company, if you're working towards finding new solutions to scientific or technological challenges, you could be eligible for R&D tax relief.

There are no limitations on the sector or activity, meaning that any company investing in Research and Development can potentially benefit from this incentive, as long as the project relates to your company's trade. This includes businesses in the fields of science, technology, engineering, healthcare, and many others.

If you're investing in R&D, make sure you explore the prospect of claiming tax relief – it could be a game-changer for your business.

How much tax relief can a business claim for R&D activities?

The amount of tax relief a business can claim for R&D activities depends on the size of the company and the R&D tax relief scheme they fall under.

The SME R&D tax credit

The SME R&D tax credit is available for small and medium-sized enterprises and is a more generous tax relief.

  • In addition to the standard 100% deduction, eligible businesses can enhance their deduction to a total of 186% by deducting an extra 86% of their qualifying costs from their yearly profit
  • If a company has claimed relief and incurred a loss, they may be eligible for a tax credit payable in cash worth up to 10% of the generated loss
  • The 'PAYE Cap': From April 2021, the SME R&D tax credit is capped at £20,000 plus 300% of the business's PAYE and NI liability for the year. The cap applies to all staff, but businesses creating or managing intellectual property and spending less than 15% of R&D costs on subcontracted work are exempt

The R&D expenditure credit (RDEC)

For larger businesses, the R&D expenditure credit (RDEC) scheme is in place. Whilst slightly less generous, this credit can be offset against the corporation tax liability or, if the business is loss-making, is repayable in cash.

The rates for calculating the expenditure credit are based on a percentage of your qualifying R&D expenditure:

  • 13% from 1 April 2020 up to and including 31 March 2023
  • 20% from 1 April 2023

The vast majority of clients fall within the SME R&D tax credit scheme rules; however, there are certain circumstances (such as receipt of other types of State Aid) whereby the RDEC scheme rules will apply.

What qualifies as R&D for tax relief purposes?

For R&D projects to qualify for tax relief, they must aim to make an advancement in the fields of science and technology, ultimately resolving uncertainties. This may include:

Developing new products, processes or service OR Improving existing ones

For R&D expenses to be eligible they must be directly associated with the project, such as staff wages, materials, software, and equipment.

Qualifying expenses may include (but are not limited to):

  • Directly employed staff: including gross wages and employers’ NI and pension contributions
  • Externally provided staff: costs paid to an external agency for staff directly and actively engaged in the R&D project
  • Subcontracted services: costs paid to third-party suppliers of services contributing to the R&D project (subject to a 65% cost restriction for the SME scheme and not eligible for payments to, amongst others, limited companies in the RDEC scheme)
  • Consumables: items directly consumed in the qualifying projects including materials and the proportion of utility costs used in the process
  • Software: the cost of software that is directly employed in the R&D activity. From April 2023, the government has also extended R&D expenditure categories to include data, cloud computing and pure mathematics
  • Trials and prototyping: payments made to volunteers to participate in clinical trials etc. or testing the activity

How do I claim R&D tax relief for my business?

If you're wondering about the process of claiming Research and Development Tax Relief for your business, the first step is knowing if your R&D activity meets the government's requirements followed by submitting your R&D tax credit claim.

We highly recommend seeking the help of a professional to guide you through the process and ensure you don't miss out on any potential benefits. Remember, R&D isn't just about tax relief - it can lead to significant advancements and improvements for your business.

To avoid the risk of a legitimate R&D submission being denied, claimants with accounting periods beginning on or after 1 April 2023 are required to pre-notify HMRC of their claims using a digital service within six months of the relevant period. However, there is an exception for companies that have already made a claim in one of the preceding three periods.

From 1 August 2023, claims for R&D expenditure credit must be accompanied by an additional information form which needs to be submitted before the company's Corporation Tax return.

What documentation do I need to support an R&D tax relief claim?

Businesses need to provide a detailed breakdown of their R&D costs, including how they are directly related to the R&D project.

To support your R&D tax relief claim, you need to provide documentation that proves your activities and expenses. Examples of R&D documentation includes:

  • Technical reports
  • Project plans
  • Timesheets that show the hours spent on R&D activities
  • Receipts and invoices for all expenses related to the R&D project

How can DSA Prospect help?

To ensure that the R&D tax relief claim is accurate and complete, businesses should seek the help of an experienced accountant. We can help compile the necessary documentation, review the expenses, and ensure that the claim is submitted on time. By doing so, businesses can maximise their tax relief entitlement and avoid any potential penalties or fines.

Here at DSA Prospect we have considerable experience in making successful and substantial claims for our clients. To discuss the potential for R&D Tax Credits for your business please contact our team today.

DSA Prospect - Research and Development Tax Relief Explainer

This blog was updated on: 10/05/2023

This blog was originally published on: 09/08/2021

Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.

Leave a Comment