R&D Tax Credits

Research and development (R&D) tax credits were introduced for small and medium sized enterprises (SMEs) in 2000 and for large companies in 2002. R&D credits are a form of corporation tax relief to encourage innovation and enterprise within the UK economy.

Small and medium-sized enterprises (SMEs) can claim SME R&D tax deductions totalling 230% of any qualifying R&D expenditure (from 1 April 2015). You can also claim a tax credit even if your company is not making a profit.

The rules for claiming R&D tax relief are very generous and, from a tax point of view, many of your business activities could qualify for relief, not just those involved in very specific scientific type research.

To qualify for R&D relief you need to explain to HMRC how a project:

• looked for an advance in science and technology;
• had to overcome uncertainty;
• tried to overcome this uncertainty;
• couldn’t be easily worked out by a professional in the field.

R&D tax relief can be used by companies that are developing new or improved systems, processes, services or products in the areas of technology or science. The R&D project in question must relate to the company’s trade and can be used by an existing company or by new start-ups.

Items that can be claimed should be used directly in qualifying R&D projects. These include operating expenses, staff and materials (including the proportion of water, fuel and power consumed in the R&D process). 

Advance Assurance

Small companies that haven’t claimed R&D before and have an annual turnover of less than £2 million and less than 50 employees can apply for Advance Assurance. This allows small companies to be able to be sure they can claim R&D tax credits before embarking on significant expenditure. Once accepted, HMRC will allow claims without further enquiries for the first 3 accounting periods of claiming R&D relief.