R&D Tax Credits

What are R&D Tax Credits?


"Government incentives to support companies undertaking innovative projects in science and technology."


Many countries around the world incentivise companies to undertake Research and Development. Collectively known as R&D Tax Credits, there are three distinct R&D Tax Relief Regimes in the UK; SME, RDEC and RDA.

Which regime (or combination of) the company will claim is determined by the size of the claimant company, the nature of the R&D and whether funding was received. Each provides a different type and level of benefit.

The three regimes each share common eligibility criteria that were issued by the government's Department of Business, Energy and Industry Strategy (BEIS). These guidelines (a.k.a. the BEIS guidelines) define the meaning of R&D for Tax Purposes and precisely what HMRC mean by many common terms that often have other meanings outside of R&D Tax.

This article explains everything companies need to know to make a claim and how the RD Relief cloud-based claim technology simplifies the preparation process.
Projects That Qualify for R&D Tax Credits do not have to be Rocket Science

Latest Updates in 2018

Main article: R&D Tax Credits News
Throughout the first half of 2018 RD Relief has continued to see an increase in both the number of R&D Tax Credit claims submitted and the level of relief claimed.
The most significant change so far in the period has been the increase in the Research and Development Expenditure Credit (RDEC) rate from 11% to 12% for expenditure incurred after the 1st April 2018. This rate increase provides welcome news for large companies and small companies that are undertaking subsidised research and development.
The eligibility criteria have not changed this year (with no significant updates 'expected' throughout the remainder of the year), but HMRC's understanding of the guidelines and the way they structure their times to check claims has continued to evolve. The increasing strength and depth of the HMRC specialist teams - to better understand the types of R&D undertaken in many common industries, demonstrates this.

The Eligibility Criteria

The UK Department for Business, Energy & Industrial Strategy (BEIS) has defined the types of projects that qualify for R&D Tax Credits. These guidelines have two key criteria:

An R&D Project must seek to achieve an
Advance in Science or Technology
The team must attempt to overcome associated
Scientific or Technological Uncertainty

Scientific or Technological Advance

The Scientific or Technological Advance could be developing a new, or appreciably improving an existing, system, process, material, device, product or service. Crucially the technological advance needs to be a step forward from the current industry baseline within the field of science or technology.
Deploying or configuring a solution according to known principles would not qualify as an advance in itself, but if one of the company's competitors have achieved the same (or a similar) Scientific or Technological Advance, but you have worked without any knowledge of their specific activities, then the work you have undertaken can still qualify for R&D Tax Credits.
Eligibility only requires an attempt to achieve a technological advance, so if a project does not complete (for any reason), then the costs incurred can still qualify.
Eligible projects must seek to research, develop, or appreciably improve:
Process
Material
Device
Product
Service
Knowledge

Scientific or Technological Uncertainty

Scientific or Technological Uncertainty is where an experienced professional in the field of science or technology, cannot readily produce a solution using their existing knowledge or any information that is readily available within the public domain.
It could be that the competent professionals don't even know whether it is possible to achieve the specific advance, or that they don't know how to accomplish the Advance in practice.
System Uncertainty is another specific type of technological uncertainty referenced in the BEIS guidelines. It concerns the scenario where Scientific or Technological Uncertainty arises from integrating well-understood and established components in new ways or turning an established technology into a cost-effective or reliable process, material, device, product or service.

The Competent Professional

The R&D eligibility criteria specifically refer to the concept of a 'competent professional' in the field of science or technology. The competent professional is a person who is close to the scientific or technological details of the research and development undertaken, understands the state of play within the industry and has a successful history within the field.
The competent professional/s will be responsible for assessing whether a project is R&D for Tax Purposes. If so, they will be accountable for determining the proportion of the costs that will qualify.

Other Requirements

The R&D project must:
  • Be in a field of science or technology (not including social sciences or pure maths).
  • Relate to your company's trade - either an existing one or one that you intend to start up based on the results of the R&D.
  • Contain scientific, or technological problems that can't be easily worked out by a professional in the field.
It is possible to claim R&D Tax Relief on unsuccessful projects.

The Three R&D Tax Credits Regimes

Which of the three R&D Tax Credit regimes a company can claim depends on the size of the company and the nature of the costs. These are as follows:

SME

Small and Medium Enterprises

Main article: SME Regime
The most beneficial of the three R&D tax relief regimes, allowing companies to:
  • Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the standard 100% deduction, to make a total 230% deduction.
  • (If loss-making) claim a tax credit of up to 14.5% of the surrenderable loss

RDEC

Research and Development Expenditure Credit

Main article: RDEC Explained
RDEC is a credit of 11% of your qualifying R&D expenditure that is subject to corporation tax.
  • Large companies undertaking (revenue in nature) projects will claim RDEC
  • SMEs (and large companies) that been subcontracted to conduct R&D will also claim RDEC

RDA

Research and Development Allowances

Main article: RDA Explained
Capital allowance incentives for projects that are capital in nature (for tax purposes).
RDA's provide a 100% first-year writing down allowances on R&D facilities, plant & machinery and IT systems.

The Solution to The Complexity is: Clever Cloud Software

RD Relief simplifies this complexity, enabling automatic allocation of your costs to the correct regime/s depending upon the options you select.
Upload your costs into our system once (per claim period and R&D department) and depending upon the answers to some simple questions, the software will automatically apportion all of the costs to the appropriate R&D credits regimes.

R&D Tax Credits Claim Benefit

Many factors can affect the level of claim benefit relative to the qualifying R&D expenditure, these include, but are not limited to:
Calculate the potential size of the benefit to your company using our free online claim benefit calculator or find out more information about the current claim rates for the SME, RDEC and RDA regimes.

SME, RDEC or RDA

There are many factors which influence the R&D regime the company will claim. These factors depend upon the size of your company, the nature of the projects and the funding of the costs.

Company Size

Main article: SME or Large
Determination of whether your company qualifies for the Small and medium-sized enterprises (SME) regime is a crucial factor that significantly affects the benefit of a claim.
  • For the company to qualify for the SME regime (which is the most beneficial regime), it must have fewer than 500 staff AND either a turnover less than €100 Million OR gross assets of less than €86 Million.
  • Any partner or linked companies must also be taken into account (by also including a portion of their figures in your figures above). You will have to verify the status of another company if your company holds more than a quarter of the others voting rights (or capital) or another company holds more than a quarter of your voting rights/capital.
  • If the company does not qualify for the SME regime because of the size requirements, then it may be eligible for the large company RDEC regime.

Capital vs Revenue Projects

Which regime a company claims, is also dependant on whether the project is capital or revenue in nature (for tax, rather than accounting purposes). The capital/revenue distinction is currently a hot topic for software development projects.

Capital Projects

Typically, capital projects will have significant expenditure for developing new asset/s that will have an enduring benefit to the company. They are likely to have been capitalised to the balance sheet.

Revenue Projects

Revenue projects are more likely to be continuously improving existing systems or capabilities. They often do not have costs that are material to the business and these costs are likely to have been expensed to the P&L.

Project Funding

If any of your projects were funded (either by other companies or grants), this can affect which R&D Relief you claim (SME, RDEC or RDA) and consequently the benefit you receive.
  • R&D subcontracted to you from an SME cannot be included.
  • R&D subcontracted to you from a large company, or in receipt of grants, can only be claimed under the RDEC regime. Consequently funded large company claims don't change, but funded SME claims see a reduction in benefit.

Includable Cost Types

Staff Costs

Time spent by Staff on an R&D project attempting to overcome technological uncertainty. The allowable cost categories include salaries, wages, class 1 NIC and pension fund contributions.

Externally Provided Workers (EPWs)

Contractors working under your company's direction, supervision or control. HMRC mandate that companies must apply a 65% factor to the eligible costs.

Subcontracted R&D

SMEs who have subcontracted out an R&D project will be eligible to claim (the 65% factor applies again here). Large companies who have subcontracted out R&D will be able to claim under the RDA regime, but not the RDEC regime.

Consumables

Consumables required for undertaking the R&D. However, subsequently sold consumables are not allowable.

Heat, Light and Power

Heat light and power can be apportioned to represent the cost attributable to R&D activities.

EPW Versus Subcontracted R&D

Correctly identifying whether a 3rd party relationship is an EPW (Externally Provided Worker) or a Subcontracted relationship is extremely important for the quantification of large company (RDEC) R&D Claims. Only EPW third-party costs can are includable within an RDEC claim, so the effect on the claim size can be significant.
There are many defining traits of both types of relationship, but it mostly comes down to a subjective assessment based on the facts.
Essentially an EPW relationship is where a company is body-shopping individuals to augment its existing team, whereas a subcontract relationship would be where a company is paying another company to undertake R&D on its behalf.

Estimate Your Claim Benefit


Simple Calculator More Accurate Calculator
Does the company (including other group members), have more than 500 employees?
Yes No
Financial Position?
Profit Making Loss Making
Accounting Treatment of the R&D Costs?
Mostly Expensed to the P&L Mostly Capitalised as Intangibles Mostly Capitalised as Tangible Fixed Assets
Which of the following best describes what you are developing?
An asset of enduring benefit to the business A product, or something that will contribute to a product
Are you a Services Company?
Yes No
Estimated spend on R&D Activities?
£50,000 £200,000 £500,000 £1,000,000

Claim Automation

Owing to various complexities of R&D Tax Credits, quantifying and qualifying claims has been challenging, leading to most companies choosing to manually prepare their claims (often with the help of professional advisors).
Through sophisticated automation, RD Relief has created simple but effective technology that covers every aspect of R&D Tax Credits. The process is presented through simplified workflows, providing customers with an efficient, robust and cost-effective way to prepare their claim.
Why manually prepare an R&D claim when the RD Relief software can do it better than any human?

Examples of Eligible R&D Industry Sectors

Across many industries sectors, numerous companies are undertaking projects that qualify for R&D Tax Credits. From Software Development to Life Sciences we now expect to find R&D. Our R&D experts have even found eligible activities in the many industries that people may not expect to be qualifying.
Find out more about R&D in your industry or view our case studies of successful claims.

HMRC Insight

The way in which HMRC administer and verify R&D Tax Credits has evolved since the conception of the relief in the year 2000 when generalised tax inspectors would review all claims. Today, HMRC have R&D Tax specialists with backgrounds (or actively undertaking) from varying fields of R&D, ensuring consistency and fairness across companies.

What HMRC Look For

There are many things that companies can do address all of HMRC's general concerns, including being clear, concise and specific in supporting documentation, purely focusing on the scientific or technological detail, but without introducing unnecessary jargon.
For certain industry sectors, HMRC inspectors have been known to use benchmarking figures to decide which claims to open enquiries. During a meeting with our R&D specialists, HMRC inspectors have quoted 30% project eligibility as a baseline figure, above which may encounter additional scrutiny may be applied. How to determine the size of the total cost pool to apply the benchmark is often a source of confusion, and thus, such a figure should be used with caution as it in some fields, project eligibilities of 90% would not be out of place.

CTO and CDIO

To accurately validate the eligibility of R&D Tax claims, HMRC engaged the CDIO (Chief Digital and Information Office). CDIO is a cross-cutting team of experts across digital, data and technology. The team are responsible for reviewing the technical details of projects submitted by clients and ensuring consistency in the Scientific or Technological Advance / Uncertainty described, and the costs included.
The CTO (Chief Technology Office) is a team sitting within the CDIO and is where many of HMRC's leading software experts sit, who will be responsible for reviewing the claims.
HMRC want companies to claim R&D Tax Credits, but to do so in a systematic and robust way

History of the R&D Tax Credits

Since the year 2000, when the government issued its first release of the BEIS guidelines (known then as the 'BIS guidelines'), the R&D Tax Credits regimes have undergone some changes. The benefit rates have generally increased, while the claim mechanics have evolved. For example, in 2013 when the 'large company' super deduction regime changed to become an above the line credit regime (known as RDEC).
The BEIS requirements themselves have not changed since the first amendment (in 2004), although the tax legislation and guidance has evolved several times over this period.

How to Make an R&D Claim

In general, for an R&D Tax Credits Claim to be made, HMRC only requires the qualifying expenditure figures within the CT600 tax return.
For R&D Tax Credits claims with significant costs, or within non-obvious R&D fields, HMRC often requires further information to be submitted. Unless HMRC has requested a specific deliverable, such as answers to specific questions, this would be in the shape of: Full details of the claim should be kept on record for six years, in case HMRC have any further questions in the future.

Choosing the Methodology

The determination of an appropriate methodology is crucial to the success of every R&D Tax Credits claim - both regarding benefit and robustness. The Methodology should be driven by the data that your company has available, as HMRC typically expect that companies with project data will use to support the R&D Tax Credits claim (unless the data is unreliable).
Whether the company has timesheet data, project list data, or no reliable records, the RD Relief portal will tailor a methodology to robustly support a claim, by allowing the data to be uploaded, manipulated online and then used to calculate the claim value.

How to Account for an R&D Tax Credits Claim

Accounting for R&D Tax Credits is usually a relatively straightforward process and depends upon which R&D regime the costs fall under, the financial position of the company, the nature of the projects and their accounting treatment.
Please also see our examples of double-entry bookkeeping accounting for R&D costs.
RD Relief - automating claims for R&D Tax Credits

About RD Relief

Combining sophisticated cloud-based technology with industry experts enables RD Relief to provide an efficient service for cost-effective, maximised, robust R&D Tax Credit claims.

Our Software

The RD Relief cloud platform enables UK companies to prepare claims for R&D Tax Credits online, significantly simplifying the claim process. RD Relief only presents the legislative and eligibility details that are relevant to your company, doing so in the simplest possible way, while helping put your company's best foot forward, ensuring that you maximise the benefit of a claim.
The secure cloud portal supports a wide range of devices and features and is updated with new capabilities on a weekly basis to save companies precious time.
RD Relief also integrates with cloud-based accounting systems (such as Xero) to streamline claims by automatically connecting and importing costs. Don't worry if we don't yet support your chosen platform, RD Relief supports straightforward uploads of spreadsheet data, or you can manually input all information.

Our Experts

Main article: The RD Relief Team
The RD Relief team thrive on innovation and harness a desire to revolutionise the efficiency of preparing claims for R&D Tax Credits. With our advanced technology, we find that most clients can complete the process without additional support from our R&D Tax Credit Experts.
For more substantial claims, or where there are specific complexities, online preparation means that we can make the most efficient use of our expert's time, ensuring that you get the best possible R&D experts for the lowest possible cost. We always believe that clients who require R&D experts should meet the exact people that will be helping support their claim before they engage.

Fee Structures

Main article: Fee Structures
Access to the RD Relief self-service R&D Tax Credit claims portal is free. Clients only pay if they require additional services to support their claim.
Although the RD Relief portal provides full training and sophisticated workflows to prepare claims of any size or complexity easily, sometimes additional support may be required. For example, to discuss the technical details of projects or to help identify areas of R&D within a company.
These R&D support activities can be undertaken on a contingent, fixed or T&M fee basis.
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