Whether your business is big or small, complex or simple, single or multi-site, Source Advisors can manage your R&D tax claim from start to finish. Source Advisors is one of the longest-established innovation tax specialists in the UK, here are some questions that we often get asked about claiming R&D tax relief.
Research and Development (R&D) tax credits are a tax relief or credit granted under the Corporation Tax Act 2019 and guidance given under CIRD80000. It allows UK Ltd companies to claim a tax credit based on the level of expenditure that is associated to R&D.
- Salaries including pension and bonuses
- Subcontractors (restrictions apply under the RDEC scheme)
- Externally provided workers
- Consumables including relevant software licences
- Heat, light, and power
- Clinical Trials
- Data licences (For full accounting periods starting on or after 1 April 2023)
- Cloud computing (For full accounting periods starting on or after 1 April 2023)
The level of cost depends on the amount of R&D activity that can be identified. This is a broad subject and includes various members of staff from skilled engineers, software architects to management and support staff.
What activities qualify for R&D tax credits?
R&D activities relate to activities or projects that are focused on creating a level of improvement or advancement. These are not routine and must have an element of technical uncertainty where the answer or solution is not obvious or easily obtainable.
Can I claim R&D tax credits?
A UK registered company can make an R&D tax claim. There is no requirement to be paying corporation tax, just be liable for tax in the event that you are profit-making. Broadly speaking if you are loss-making, you can convert the tax credit to be a cash benefit to the business. If you are making profit, you can offset the credit against your tax liability.
How do R&D tax credits work?
You make a claim directly to HMRC with a summary of the costs associated with the R&D in the business along with a technical description of the work carried out.
Who qualifies for R&D tax credits?
Many companies in the UK qualify for R&D tax credits under the SME or RDEC scheme. Find out more here.
How much is the R&D tax credit?
The average R&D tax benefit claim in the UK for 2021-22 is projected to be £84,000. This ranges from a few thousand to millions of pounds.
Do R&D tax credits count as state aid?
Under the SME scheme, R&D tax credits will count towards state aid, but not under the RDEC scheme.
Can I make an R&D tax credit claim if I have a grant?
If your business has received a grant, an R&D claim can still be made. It is likely to impact the value of the claim as it is likely that if you are an SME, the project that the grant is based on will then fall into the RDEC scheme which is not as advantageous.
Does software development qualify for R&D credit?
Most companies will now have a level of software development and it can be considered as qualified expenditure for R&D tax credits. The tests of advancement overcoming challenges and the answer not readily deductible still apply. It is becoming increasingly more challenging to separate routine software development from qualifying development for tax purposes and why the use of a specialist company who understands both the technical specifics of the industry as well as the legislation is more imperative now than ever before.
Can I capitalise R&D spend and still make an R&D tax credit claim?
If you have capitalised the R&D costs as an intangible fixed asset, an R&D tax credit claim can still be made against those costs that qualify. If they have been capitalised as a fixed asset, they cannot be considered for a tax credit but can benefit from Research and Development allowances.
What are Research and Development Capital Allowances?
Research and Development Allowances (RDAs) provide a tax deduction on a company’s capital expenditure that is associated to R&D activity. It provides a 100% deduction for tax purposes and has a wider scope for qualifying costs than standard capital allowances.
If you have any further questions please contact our experts who will be happy to help.
FAQs
The R&D Tax Credit (26 U.S. Code §41) is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software.
How to calculate the R&D tax credit? ›
Alternative Simplified Credit method
- Figure the company's average qualified research expenses (QREs) for the past three years.
- Multiply that average by 50%
- Subtract the result of Step 2 from the company's current year QREs.
- Calculate the credit by multiplying the result of Step 3 by 14%.
One of the biggest benefits of the R&D tax credit is that it can reduce federal, and some states', taxable income. This means that companies receive a dollar-for-dollar tax credit and still get to deduct expenses related to research and development, which can total a 10 to 15 percent return on investment.
How much can you save with R&D tax credit? ›
Typically, 6% to 8% of a company's annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Various activities may qualify for the credit, including but not limited to: Developing processes, patents, formulas, techniques, prototypes or software.
What are the four criteria for R&D tax credit? ›
R&D tax credit: How do you qualify? We'll look at your activities and projects performed during the tax year to see if they meet the IRS' definition of R&D, which is based on four criteria: The purpose of the activity must be to improve the function, performance, reliability, and quality of a product or process.
What does not qualify for the R&D credit? ›
You can use existing technologies and existing scientific principles. Note: Research in the social sciences (for example, economics, business management, behavioral sciences, arts, or humanities) doesn't qualify for the credit.
What is the 80% rule for R&D credit? ›
The 80% rule for the R&D tax credit states that businesses can claim 100% of W-2 wages paid to employees spending at least 80% of their time on qualified R&D activities. This allows businesses to estimate the qualified R&D amount to be 80% or more for salaried employees and use the full 100%.
How do I document my R&D tax credit? ›
The following are examples of the types of documentation that can be used to substantiate qualified research wages:
- Employee W-2s.
- Payroll registers.
- Time tracking data.
- Time questionnaires.
- Interview notes for oral testimony.
- Job descriptions.
- Department / Cost Center descriptions.
- Meeting minutes.
The RDEC scheme returns 20% gross and 15% net of your qualifying R&D expenditure. The SME scheme returns up to 27%, and the credit is not subject to corporation tax. The main reason businesses need to claim through the RDEC scheme is their size. R&D-intensive SMEs have access to the highest %, which is 27%.
What are qualified expenses for R&D credit? ›
According to the IRS in Section 41(b), R&D Tax Credit qualified expenses are the costs a company pays in association with conducting research activities that will fit within the stipulations of the R&D Tax Credit. Qualified research expenses include: Employee compensation for performing certain qualified services.
Beginning for the 2023 tax year, small businesses can now apply up to $500,000 of their R&D credits, and the credit can offset both employer Social Security and Medicare taxes, providing even more cash flow benefits to early-stage organizations investing in R&D.
What is an example of an R&D expense? ›
For example, if a pharmaceutical firm hires research scientists to develop new drugs, the salaries of these researchers will generally be expensed in the R&D expense category. Like marketing expenses, but unlike capital expenditures, R&D expenses are subtracted from revenues every year directly.
What happens to unused R&D credits? ›
Any unused R&D credits will carry forward for up to 20 years. In addition to carryforwards, the research tax credit can also be carried back one year.
What is the federal R&D credit limit? ›
For companies that meet the criteria of a Qualified Small Business, the R&D credit can be used to offset quarterly payroll taxes. For tax years 2016 through 2022, the maximum R&D tax credit for payroll tax was $250,000. The credit doubled to $500,000 beginning January 1, 2023.
Can you write off R&D expenses? ›
Highlights. Specified research and development (R&D) and experimental expenditures no longer are deductible beginning with the 2022 tax year following revisions made to Internal Revenue Code Section 174 as part of the Tax Cuts and Jobs Act.
What is the use of R&D tax credit? ›
The R&D tax credit is a valuable tax-based incentive that is designed to encourage investment in R&D by companies in Ireland. The credit operates by giving you up to 25 percent of your R&D expenditure (both revenue and capital) in a tax credit or in cash (subject to certain conditions being met).
What is the R&D credit rule? ›
The Research and Development tax credit is a federal tax liability reduction companies can take for approved domestic expenses. The rate of reduction is dollar for dollar. You also get back approximately 13 cents for every dollar spent on research that meets the eligibility requirements.
How are R&D tax credits accounted for? ›
In other words, your R&D tax credit is not taxable income. It is a below-the-line benefit and will be shown in your income statement (also known as your profit-and-loss account) either as a Corporation Tax reduction or a credit. Eligible costs are essentially written off as expenses so you get a lot of this money back.
