The Ultimate Guide to R&D Tax Relief

The Ultimate Guide to R&D Tax Relief

Summary: Innovation is at the core of any successful business enabling it to evolve and adapt to ever-changing markets, regulations, and horizons. However, pursuing cutting-edge projects is often associated with a substantial cost to fund this innovation, which can act as a deterrent due to the associated technical and financial risks involved with undertaking such activities. Research and development (R&D) tax relief can remedy this issue, due to the ability to unlock vital funding and get funds and cash back into a business. R&D tax relief enables a business to be rewarded for innovation and fuel future innovative and disruptive projects.
Introduction:
Welcome to RCK's ultimate guide, designed to aid businesses in understanding how to utilise the R&D tax relief scheme to advance their goals and enable further funding for innovation and operations. Agnostic of sector, whether you are a tech start-up, an established manufacturing company, or sit within the construction field, understanding how to take advantage of R&D tax incentives can be invaluable for your business. In this guide, we will demystify the R&D tax relief scheme, offering insights into the scheme and how to utilise it to ensure that you maximise the benefit you are eligible for. We will also outline the governing tax legislation, eligible costs and projects and provide insight on how to submit your application. In doing this, we will highlight potential areas of caution and FAQs that we commonly receive.

What is R&D?
R&D tax relief was launched in 2000 by the UK government and is administered by HMRC. The scheme is intended to encourage and incentivise innovation and reward companies who invest in R&D activities to drive economic growth within the UK. In essence, a business that participates in innovative projects can be provided with tax relief to encourage further investment in innovation. To give an indication of numbers, HMRC, in the most recent statistics they have provided, share that an estimated total amount of R&D tax relief claimed, for the tax year 2021-2022 was £7.6 billion.

R&D tax credit requirements
R&D tax relief can cover a broad range of activities within a broad range of industries, how this is defined by HMRC can be broken down into three distinct criteria:

1. Firstly, the activity has to have achieved or seeking to achieve a scientific or technological advancement. This means that in carrying out the R&D, the business is advancing beyond the baseline for science or technology, within their field.
2. Secondly, is that by engaging in the activities a degree of scientific or technological uncertainty was encountered. This assesses the difficulty of the project and any challenges that have been encountered in the project, and how the uncertainties have been overcome. Within this, the projects uncertainties are considered in relation to its R&D, and the journey undertaken to resolve these uncertainties is evaluated regarding whether the solution was readily deducible to a ‘competent professional’ in the field.
3. The final criteria that must be satisfied, is ensuring that the company followed a systematic and logical process. Here it must be ascertained that a full development process was followed which was carefully thought out and pre-planned.
There are a few financial criteria that a company must also meet to be considered eligible and the legislation allows for distinct costs to be claimed.

The benefits of R&D tax relief:
There are several benefits associated with R&D tax relief to both the business and the wider economy, listed below:

• R&D tax relief encourages innovation by reducing the financial burden for those who undertake eligible R&D activities.
• R&D tax relief supports both SME’s and large companies. Specifically for SME’s, this can be beneficial where cash is often less accessible and available than in larger companies, helping to create a fairer environment so that smaller companies can innovate also.
• R&D tax credits enable businesses to gain a competitive advantage within their industry, as they can allocate more resources to R&D efforts in the knowledge they can claim for the R&D tax credit.
• Enhanced innovation provided by R&D tax relief, stimulates economic growth by enabling businesses to develop new products, processes, and services, enter new markets, and boost UK knowledge within a rapidly developing global economy.
• R&D tax incentives attract UK investment from foreign investors, again simulating economic growth.

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‍R&D tax relief eligibility criteria:
The five categories of cost which are eligible to be claimed in the R&D scheme, specifically in relation to the value directly attributed to R&D projects are listed below:
1. Staffing costs: inclusive of gross salaries, employers’ pension payments, and employers’ national insurance.
2. Consumables: any resources that have been consumed, transformed, or destroyed in R&D processes, such as raw materials, utility expenses and prototype costs.
3. Software: includes the purchase and maintenance costs of any software used in R&D activities. From 1st April 2024 expenditure incurred on data purchases and cloud computing is also eligible.
4. Sub-contracting/Outsourcing: costs associated with the hire of external contractors undertaking R&D activities.
5. Externally Provided Workers: agency workers hired through intermediaries that contribute to resolving uncertainties within qualifying projects.
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Tips for maximising your R&D tax relief claim:
Now that you're aware of the potential benefits of R&D tax relief, let's explore some effective strategies for maximising your claim, whilst remaining compliant. By implementing these tips, you can ensure you're making the most of this valuable incentive and securing the funding you need for your innovation endeavours.

1. Identify all eligible projects: Take the time to identify all the projects within your organisation that may qualify for R&D tax relief. This requires a thorough understanding of the criteria set in the DSIT guidelines. Keep in mind that R&D activities can range from incremental improvements to ground-breaking innovations, so long as the underlying science or technology is being advanced beyond the baseline for the field. Being diligent in recognising all eligible projects will maximise your claim potential.

2. Capture qualifying expenditures: To optimise your R&D tax relief claim, it's crucial to accurately capture all qualifying expenditures related to your projects. These expenditures are outlined above and whilst gathering the raw data is often straightforward, determining expenditure for R&D activities often requires specialist advice. Maintaining detailed records and working closely with your finance team or tax specialists will help ensure you don't miss out on any eligible expenses.‍

3. Document your R&D activities: When it comes to R&D tax relief, documentation is key. Keep thorough records of your R&D activities, including project plans, experiment results, emails within teams, technical reports, and any other relevant documentation. This will not only support your claim but also demonstrate the scientific or technological advancements achieved through your projects. The more comprehensive your documentation, the stronger the claim will be.

4. Engage an R&D tax relief specialist: Consider partnering with an R&D tax relief specialist who can guide you through the process and help optimise your claim. Specialists have in-depth knowledge of the R&D tax relief landscape and can provide valuable insights and expertise. They work with you to identify eligible projects, calculate qualifying expenditures, and ensure compliance with the tax authorities' requirements.
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Other innovation incentives available:
While R&D tax relief is a powerful tool for funding innovation, there are other schemes that can also be utilised in conjunction with the scheme or as a standalone claim.

1. Patent box tax relief: Patent box tax relief is available to UK businesses to offer a reduction in corporation tax on any profits attributable to patents and other IP.

2. Grant Funding: there are many forms of grants available from scientific funding bodies such as Innovate UK. The UK has re-joined the EU’s Horizon program and funding is coming through from that scheme also.
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R&D tax relief FAQ’s:
1. Is R&D relief taxable?
The SME scheme is a non-taxable credit or reduction in corporation tax. The RDEC scheme (for large companies or SMEs that have not self-funded R&D) is a taxable ‘above-the-line’ credit.

2. How are R&D tax credits paid?
The benefit is received via a reduction to the business’s corporation tax liability or as a cash lump sum.

3. Doesn't my accountant already claim R&D tax? ‍
It is likely that your accountant will already provide R&D tax relief services, however, we often see that accountants are often not capturing all eligible projects or expenditure and are therefore not claiming the entitled full benefits on behalf of clients. As areas of R&D tax relief are complex and can be subjective, it requires someone with a technical background and understanding of the specific industry to dive in to the details and identify all qualifying expenditure.

4. How long does it take to claim R&D tax relief and receive the payment?
The claim process is typically anywhere from 4-8 weeks. We would require a series of calls with the competent professionals within the business and then time to complete the technical narrative and financial assessment and pass everything through our in-house compliance team.

5. What industries can claim R&D tax relief?
R&D tax relief covers a broad range of activities across various industries. There is not a set list of applicable industries although of course, some will naturally have more inclination towards requiring innovation than others!
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Conclusion
R&D tax credits are an opportunity for businesses of all sizes and within a wide range of industries to gain financial benefits for their innovation and unlock additional funding for their businesses.
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