R&D Tax Credits Explained

Research and development (R&D) tax credits are a government incentive designed to encourage companies to invest in innovation and R&D activities. The benefits of the incentive have increased in recent years as it is recognised that companies have to undertake R&D to stay competitive in the global economy. As such, the government is encouraging companies to undertake R&D and also to make a claim for R&D tax credits.

Key features of R&D tax credits

Companies that undertake qualifying R&D activities can typically claim additional tax deductions based on the amount of expenditure incurred. These additional tax deductions reduce trading profits subject to corporation tax, or can create or increase trading losses. The key features of these generous tax incentives are:

  • A small or medium sized company (SME) can claim an additional tax deduction of 130% of the qualifying R&D expenditure incurred in calculating its trading profits for corporation tax purposes.
  • For example, a company that spends £100,000 on qualifying R&D can claim an additional tax deduction of £130,000. This would result in an additional corporation tax saving of £24,700 based on the current corporation tax rate of 19%.
  • Loss making companies can still benefit as they can claim a cash payment at a rate of 14.5%.
  • A large company, or an SME that receives certain grants, can claim under a separate scheme known as the R&D Expenditure Credit (RDEC). This enables a company to claim a taxable credit based on qualifying expenditure at a rate of 11%.
  • If a company has not previously claimed, it can normally make a claim for the preceding two years which can lead to a significant cash injection.
  • The claim is included in the company’s tax return.
  • It is also necessary to prepare and submit a report to set out the R&D undertaken and to outline the qualifying costs incurred. This requires specialist knowledge and experience as it is vital to ensure that the appropriate information is provided.

Who can benefit from R&D tax credits?

In a nutshell, companies that spend money developing new products, processes or services – or improving existing ones – may be eligible for R&D tax relief.

The R&D for these purposes does not have to be totally ground-breaking and you may be surprised what could qualify. For example, all manufacturing companies should in principle be carrying out an element of R&D in their business and even small amounts of R&D can lead to significant corporation tax savings.

Here are some recent examples of successful claims we have made for clients:

  • Printing company developing new packaging products
  • Manufacturing company in the healthcare industry developing new products
  • Software company developing new software
  • Engineering company developing new products
  • Food processing company seeking to extend shelf life
  • Architect incorporating environmental features into designs
  • Aeronautical company developing new concepts
  • Bakery developing gluten-free products

Is your company missing out on significant corporation tax savings that may be available?

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