R&D Tax Credits Explained
Supporting businesses that are taking commercial risks to advance industry knowledge, products, processes and services.
R&D relief awarded to UK businesses in 2020-21.
R&D tax credits are a UK government incentive aimed to support innovation within limited companies.
It enables businesses to deduct up to an additional 86% off a qualifying R&D projects spend. (Please note, for accounting periods starting on or after 1st April 2024 a new merged R&D tax credit scheme will come into effect and offer an additional tax credit gross benefit of 20% (R&D intensive loss-making SMEs, might qualify for Enhanced Research and Development Intensive Support (ERIS) and could receive a enhanced payable credit rate of 14.5% ))
However, to qualify, the innovative project must attempt to overcome a scientific or technological uncertainty within a particular field.
To qualify, an R&D project must attempt to overcome “scientific or technological uncertainties”.
Simply put, this is when a business sees a gap within the market and they decide to commit financially and with the time of a qualified professional to embark on a process of investigative testing, all in the hopes of solving an unknown solution.
This testing phase is what qualifies; therefore, a failed or successful solution can still claim, as long as it extends the knowledge within their field.
To qualify for the R&D support, a business must fulfil the following criteria:
R&D tax credits support innovation projects from the start to the end of the scientific and technological uncertainty. Below is an example of where, in a product’s life-cycle, qualifying R&D activity can occur.
Commercial/Scientific Idea
Market/Feasibility Research
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
Patents or other IP protection sought
Pre-production design
Industrial upscaling
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
There are five pillars of qualifying R&D costs you can claim for within the “uncertainty” phase of an innovation project.
Under the R&D tax credit incentive, you can claim the following costs for staff or externally paid workers (EPWs) who were directly involved in an R&D project (they had “hands on” input), and some managerial time:
Salaries
Wages
NICs contributions
Pension contributions
Software expenditure that was directly involved in the R&D project. You can also claim for a proportion of software that was only partly used in innovation activities.
For financial years beginning on or after 1st April 2023, you will be able to claim for Data & Cloud Computing Costs directly involved with the R&D project that fall into the following categories:
Data storage
Hardware facilities
Operating systems
Software platforms
Purchase costs of data sets
Materials and hardware that are directly consumed during the R&D project.
This includes chemicals, ingredients and electrical components.
These materials and their outputs must not be commercially viable.
Power, water and fuel that are directly used in an R&D project.
Calculating the proportion of utility costs used in an R&D project can be difficult, but the Amplifi team can advise you on the best practices.
SME Scheme – you can claim for 65% of unconnected subcontractors and freelancer costs under the SME scheme. The rules are more complex for connected subcontractors.
RDEC scheme – restricted to R&D project payments made to individuals, a partnership of individuals or a qualifying organisation.
Merged scheme and ERIS – Whoever decided to undertake the R&D can claim. You can claim 65% of an R&D payment made to an unconnected contractor, or up to 100% for a connected contractor.
Overseas Restrictions – From accounting periods beginning on or after 1st April 2024, all claimants’ (expect NI registered companies claiming ERIS) contracted R&D activities must now be undertaken in the UK, plus the company or staff controller of any R&D related EPWs is required to apply PAYE and NICs for that worker.
Any incorporated business in any sector is eligible. As long as they are trying to “resolve scientific or technological uncertainties”. Please note that for accounting periods commencing 1 April 2024 a new merged R&D tax credit scheme will come into effect.
The SME scheme is for qualifying R&D activity in small and medium-sized businesses.
For expenditure made on or before 31st March 2023, it offers an additional tax deduction of up to 130%.
For expenditure made from 1st April 2023, it offers an additional tax deduction of up to 86%.
The RDEC scheme is for qualifying R&D activity in large enterprises
For expenditure made on or before 31st March 2023, it offers an additional tax credit gross benefit of 13%.
For expenditure made from 1st April 2023, it offers an additional tax credit gross benefit of 20%.
Migrating from the SME & RDEC scheme to the Merged scheme and Enhanced R&D Intensive Rate
This single scheme replaces the previous SME and RDEC schemes and provides an additional tax credit gross benefit of 20%.
The merged scheme applies to R&D expenditure incurred in accounting periods commencing on or after 1st April 2024.
The Enhanced R&D Intensive Rate (ERIS) is an enhanced payable credit rate of 14.5% is available for eligible R&D intensive loss-making SMEs that fall into the below criteria: