What Are Research & Development Tax Credits?

UK R&D (Research and Development) tax credits are a government incentive designed to encourage and support innovation and research activities conducted by companies within the United Kingdom. These tax credits provide financial relief to businesses engaged in qualifying R&D activities by reducing their tax liability or providing cash payments.

What Are The Tax Credits Available?

There are two types of R&D tax credits available in the UK:

1. R&D Tax Relief for SMEs - Small and Medium-sized Enterprises (SMEs) can claim an enhanced deduction on qualifying R&D expenditure. Currently, SMEs can claim a deduction of 186% of eligible R&D costs, which means for every £100 spent on qualifying R&D activities, an additional £86 is deducted from the taxable profit. This deduction is in addition to the regular deduction for the actual R&D expenditure incurred, which is currently 10%.
2. R&D Expenditure Credit (RDEC) - Large companies and some SMEs that do not meet the criteria for SME R&D relief can claim the RDEC. RDEC is a taxable credit that is calculated as a percentage of qualifying R&D expenditure. The current RDEC rate is 20%.

How Do You Qualify For Tax Credits?

To qualify for R&D tax credits, a project must meet certain HM Revenue & Customs (HMRC) criteria. The project should aim to achieve scientific or technological advancements, resolve scientific or technological uncertainties, and involve activities that are not readily deducible by a competent professional in the field. The R&D must also be relevant to the company's trade or industry.

When applying for R&D tax credits, companies must provide supporting documentation and evidence to substantiate their claim. This includes detailed project descriptions, technical documentation, expenditure breakdowns, and evidence of technological uncertainties.

The amount of R&D tax credits a company can claim depends on the eligible R&D expenditure incurred during the accounting period. The credits can be used to reduce a company's tax liability or, in the case of SMEs, to generate cash refunds if the tax credit exceeds the tax liability.