R & D Tax Credits

R&D tax credits are a government incentive designed to encourage companies to invest in innovation. The scheme allows companies to deduct a proportion of their qualifying R&D expenditure from their yearly profit, or to claim a tax credit if the company is making a loss. The R&D tax credit schemes are designed to boost innovation, productivity, and competitiveness for UK companies across various sectors, including manufacturing, technology, engineering, and life sciences.

There are two main R&D tax credit schemes in the UK:

Small or Medium-sized Enterprise (SME) R&D Relief:

This scheme allows SMEs to deduct an extra 130% of their qualifying costs from their yearly profit, as well as a payable tax credit if the company is loss-making.

Research and Development Expenditure Credit (RDEC):

This scheme is for larger companies and allows them to claim a reimbursable tax credit of up to 13% of their qualifying R&D expenditure.

If your company carries out research and development, you may be eligible for tax incentives through one or both of these schemes. Limited companies spending money trying to develop a new process, material, device, product or service, or making significant improvement to existing ones, may be entitled to claim.

Staff costs are often one of the largest areas of expenditure for companies undertaking R&D projects. As such, they represent a significant portion of potential R&D tax relief claims.

It’s essential to understand the specific rules and requirements to ensure staff costs are properly claimed.

Staff Costs

Paying employees is often one of the largest areas of expenditure in R&D. The staff costs that qualify include: Salaries (including wages, overtime and bonuses); Employers National Insurance and Pension contributions; Out of Pocket expenses incurred for R&D (such as travel and subsistence costs)
There are some specific exclusions from qualifying staff costs, benefits of employment such as private medical and health insurance and company cars. The other big exclusion particularly relevant to SMEs is directors’ dividends. It should also be noted that you can only claim for staff salaries as a proportion of their time spent on activities that directly contribute to the R&D process and to those qualifying indirect activities that support the R&D process. So if an employee spends 50% of their time working on R&D projects, 10% of their time on qualifying indirect activities and the rest of their time on normal day-to-day operations, you can only claim against 60% of their salary.

Software

If you need a specific piece of software for your R&D work, you can include this as a part of your claim. Once again, the use of the software should be apportioned. If the software is used for other parts of your operational activities unrelated to R&D, you should only claim for a reasonable apportionment. If you have to build software to support your R&D and that software is not R&D itself, you can still claim for the creation of the software as it will be a qualifying indirect activity.
Consumed Materials
Some Research and Development requires the production of samples or proof of concepts, where materials have been consumed or transformed and cannot be reused in further R&D or in commercial activity and the proof of concept is not going to be sold, the company can claim for the materials that have been consumed.
Consumed Utilities (Heat, Light, Water and Power)
R&D Projects consume a lot of utilities, a reasonable apportionment of these costs can be included in your R&D claim. The reasonable apportionment for utilities, may be a completely different calculation to the reasonable apportionment of software costs.

Externally Provided Workers

Externally provided workers (EPWs) are those working in your business who are not directly contracted by your company. This can include agency workers, individual contractors, and other freelancers.
EPWs work under your supervision and control as a part of a qualifying R&D project. Once again it should be noted that only the relevant level of expenditure can be claimed against if the EPW carries out non-R&D-related work for you.
Subcontracted R&D
It may be the case that you have subcontracted a specific aspect of your R&D work to a specialist company. For example, in technology, if you had contracted a specialist company to carry out work on a specific module on your behalf – this counts as subcontracted R&D work.
As with staff costs above, you must apportion the correct amount of time that was spent conducting R&D work. Also only small and medium sized companies can claim for work that they subcontract out that supports the R&D. The subcontracted work doesn’t have to be RD in its own right.

Subjects of Clinical trials

Clinical trials can be a very important aspect of R&D work in the medical and pharmaceutical fields, and the costs for the subjects in these trials can be claimed against.

Contributions to Independent Research

These are payments generally made by large companies to other organisations to support their R&D projects, this might be to charities such as Cancer Research or to a University. The rules stipulate that the recipient must be carrying out research relevant to your industry and must be a qualifying body, such as a scientific research body, a charity or a university. You can only claim for Contributions to Independent Research under the RDEC Scheme.

Qualifying Indirect Activities

These are activities which form part of a project but do not directly contribute to the resolution of the scientific or technological uncertainty. They are generally additions to staff time, but could be provided by third parties. They are:
scientific and technical information services, insofar as they are conducted for the purpose of R&D support (such as the preparation of the original report of R&D findings);
indirect supporting activities such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D;
ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes);
training required to directly support an R&D project;
research by students and researchers carried out at universities;
research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right; and
feasibility studies to inform the strategic direction of a specific R&D activity.