What are Research and Development Tax Credits?
What are R&D Tax Credits?
R&D Tax Credits are a valuable Government incentive that can help companies offset the costs of research and development (R&D) activities. This incentive can provide significant financial benefits for businesses of all sizes and industries that are investing in innovation.
Why claim R&D Tax Credits
R&D Tax Credits are designed to encourage companies to invest in activities that will ultimately lead to the development of new products, processes and services. The incentive can be used to offset a proportion of the costs associated with these activities, such as qualifying employee salaries, third-party costs, software licences, and consumables.
R&D Claim Criteria
To qualify for R&D Tax Credits, a company must be able to demonstrate that it has undertaken activities that meet the criteria set out by the HMRC, in that they must:
- Be aimed at achieving an advance in science or technology.
- Relate to the company’s trade and should be undertaken in pursuance of extending knowledge within the wider industry sector, rather than simply furthering the company’s scientific or technological education or knowledge.
- Not be a routine or routine-like activity.
- Involve an element of uncertainty that could only be overcome through the use of scientific or technological means – not easily resolvable by a competent professional in the field.
In addition to meeting these criteria, companies must also be able to demonstrate that they bore the financial risk of project failure and have therefore incurred qualifying R&D costs.
Examples of sectors where qualifying R&D may take place
Research and Development Tax Credits can apply to a wide range of sectors, as long as the work undertaken meets the eligibility criteria. Some examples of sectors where R&D Tax Credits may apply include:
- Technology: software development, computer hardware, artificial intelligence, internet of things, mobile applications, cybersecurity.
- Manufacturing: automotive, aerospace, engineering, advanced materials, medical devices, biotechnology, pharmaceuticals.
- Energy: renewable energy, nuclear, oil and gas.
- Construction: building Information Modelling (BIM), sustainable construction, smart buildings.
- Agriculture and Food: developing new products and processes, breeding, genetics, and food safety.
- Environmental: waste management, pollution control, water treatment.
It’s important to note that these are just a few examples and R&D tax credits can apply to many other sectors as well, as long as the company is carrying out R&D activities that meet the criteria for eligibility.
R&D Claim Benefit
The amount of benefit a company can claim depends on their size and the type of R&D activities it undertaken. For small and medium-sized enterprises (SMEs), the benefit is worth up to 33% (pre-March 2023) and 21.5% (from April 2023) of the qualifying costs; for larger companies, the benefit is worth up to 10.5% (pre–March 2023 and 15% (from April 2023) of the qualifying costs.
It’s worth noting that R&D Tax Credits can be claimed in conjunction with other Government incentives, such as Patent Box, Capital Allowances and Grants.
Overall, R&D Tax Credits are a valuable tool for companies investing in innovation. By offsetting the costs of compliant activity, the incentive can help companies continue to develop and/or improve products, processes, systems, devices and materials, ultimately leading to growth and expansion. R&D Tax Credits can also help companies attract and retain talent and gain a competitive advantage in the marketplace.
Businesses are highly recommended to consult with a specialist R&D Tax Credit firm such as Innovation Tax, as they can provide valuable guidance and support throughout the process, helping businesses to claim the maximum amount possible.
To learn more about R&D Tax Credits, please visit our services page for further information: R&D Tax Credits Experts – Innovation Tax