Research and development (R&D) is a key growth enabler for UK companies. It can help improve profitability, lead to improvements of existing products and processes, create new lines or products, and provide a competitive advantage – and is increasingly important for a wide range of industries.
Businesses can request money back for carrying out R&D, but every year millions of pounds of R&D tax credits are unclaimed. So, what exactly is R&D, does your company carry it out, and how much R&D can you claim?
How important is R&D?
R&D is the part of a business that aims to develop, design and enhance its products, services, technologies, or processes.
According to the Royal Society: “R&D and innovation benefits people in the UK and around the world by underpinning our industries, creating jobs and applications that improve the quality of our lives and enriching our cultural wellbeing.”
The government is very aware of the importance of R&D to the UK economy and has committed to significantly increasing spending to £39.8m for 2022-2025.
As part of that commitment, financial help is available to UK firms, but many businesses are still unaware that they qualify, leaving millions of pounds worth of tax credits unclaimed.
What are R&D tax credits?
R&D tax credits are a Corporation Tax (CT) tax relief, helping reduce companies’ spending on R&D by claiming back tax for R&D investment.
For the year ending March 2020 (the most recent data) the government paid out £7.4bn on around £47.5bn of R&D expenditure, across 85,900 claims. With more than 5 million private sector businesses in the UK – many of which will be carrying out R&D – that means many eligible businesses are missing out.
For tax purposes, R&D is defined as when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. This could include:
- Advancing science or technology within your industry
- Displaying innovation and seeking to make advancements
- Developing engineering architecture
- Process of creating or modifying new or existing products, processes or services, or enhancing existing ones
- Overcoming scientific or tech problems with products you have developed
- Developing experimental models and prototypes
You will need to explain how your project aimed to make an advance in science and technology; and how it tried to overcome uncertainty, dealing with it in a way that could not be easily solved by a professional in that sector.
The government scheme will pay businesses a percentage of costs – whether these projects succeed or fail. In some circumstances, new businesses that are not yet making a profit can surrender their losses in return for a payable tax credit.
For firms that do not realise they have a lot of R&D, claiming back tax could make a huge difference to their ability to grow their business.
How much R&D can you claim?
R&D tax credits can be claimed on staff costs, utilities (water, heat, power), materials, subcontractor costs and software.
Any limited company, of any size, in any sector, can make a claim for the two most recent accounting years, as long as it is UK-based.
There are different types of R&D relief, depending on the size of your company and whether or not the project has been subcontracted to you.
Small and Medium Sized Enterprises (SME) R&D Relief enables smaller companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction. It also allows you to claim a tax credit if your company is not yet making a profit, worth up to 14.5% of the surrenderable loss.
Meanwhile, Research and Development Expenditure Credit is for larger companies, but can also be claimed by SMEs who have been subcontracted to do R&D work by a large company. The tax credit is currently 13% of your qualifying R&D expenditure.
How Grantica can help
Many businesses, of all sizes, have to guess their way through the applications for R&D funding. And most accountants and R&D firms need more in-house expertise to help companies claim the most complete credit.
HMRC keeps a close eye at claims, and making sure everything on your application qualifies as research is key to maximising your R&D claim. That means seeking guidance from experts, who know what an R&D claim is, and how to create a credible claim.
As a specialist in R&D for UK companies, Grantica can safely and securely help businesses identify R&D within their activities and establish how much R&D funding you can claim through the accredited Grantica R&D Framework™.
Our unique HMRC-compliant process sees chartered engineers and tax advisers handle everything for you. Offering a professional opinion and complete transparency, at every step.