What are R&D tax credits?

R&D tax credits, also known as research and development tax credits, are a government scheme designed to provide an incentive for companies to invest in innovation. Used correctly, they can help any company source the funding they need to accelerate R&D, hire new personnel and drive business growth.

R&D tax credits explained

If your company invests in developing new products, processes or services, or even the improvement of existing versions, then it is eligible to claim R&D tax credits. If company funds are being invested in innovation then a claim can be made for either a cash payment or Corporation Tax relief. In some cases the R&D tax credits may be a combination of the two. On the first occasion a business makes a claim for R&D tax credits, it can do so based on the last two completed accounting periods. 

Eligibility for R&D tax credits

To be eligible for R&D tax credits a business has to satisfy these criteria:

• It is a limited company based in the UK and subject to Corporation Tax

• It has carried out research and development activities that qualify for the credits

• These activities have incurred a monetary expense

There is literally no limit to the number of sectors in which a business claiming R&D tax credits can operate. In everything from graphic design to bread-baking and construction to app development, it is possible to engage in the kind of research and development that applies to the scheme. 

Defining R&D

For the purposes of R&D tax credits the definition of R&D has been made very broad. The size of your business and the sector you work in is irrelevant, as long as you can demonstrate that you are funnelling some of your income into the kind of risk-taking designed to deliver either of the following:

• The creation of new products, processes or services

• A change or modification to an existing product, process or service

In both of these cases a business may have to engage in qualifying R&D to ascertain what is needed to deliver the intended change. The costs that might be included in a claim for R&D tax credits include:

• Staff costs, including salaries

• Employers’ National Insurance contributions

• Pension contributions

• Reimbursed expenses

• Costs generated by subcontractors and freelancers

• Materials used during the R&D process such as heat, power, lighting etc. 

• Specific types of software

Note that R&D tax credits can be claimed based on R&D even if it ultimately fails to deliver the intended innovation. 

How much can a company claim in R&D tax credits?

Any R&D tax credit is calculated using the amount spent on R&D. Once all qualifying expenditure has been taken into account, an SME (defined as a business with fewer than 250 employees) can claim as much as 33p in every £1 that qualifies as R&D spend. If your business is making a profit then the R&D tax credits can be claimed as a Corporation Tax reduction, whereas if it is making a loss they can be claimed as a cash injection. Sometimes the two types of R&D tax credits can be combined.

In the UK in 2018/19 the average R&D tax credit claim made by SMEs was worth £57,228. For larger companies, able to claim as much as 11p in every £1 spent on R&D activities – in the form of a Research and Development Expenditure Credit (RDEC) – the average claim over the same period amounted to £632,931.     

We can help

Making an accurate claim for R&D tax credits involves knowing exactly how much income your business generates through payments. Partnering with GoCardless keeps things as simple as possible and this includes the more complex aspects such as dealing with ad hoc payments or recurring payments.