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Research and Development Tax Credit in the UK: What You Need to Know

The Research and Development Tax Credit (R&D) is a government scheme designed to encourage innovation and increase investment in research and development by reducing the cost for UK businesses. The R&D tax credit can be claimed by eligible businesses to offset some of the costs of qualifying R&D activities. In this article, we’ll explore what the R&D tax credit is, how it works, and who is eligible.

What is the Research and Development Tax Credit?

The Research and Development Tax Credit is a tax incentive scheme that was introduced by the UK government in 2000. It was designed to encourage businesses of all sizes to invest in R&D activities by offering a tax relief. The R&D tax credit is available to companies that are subject to UK corporation tax.

How does the Research and Development Tax Credit work?

The R&D tax credit is a tax relief that can be claimed by companies that are engaged in R&D activities. These activities must be scientific or technological in nature, and must aim to achieve an advance in the field. The R&D tax credit is calculated as a percentage of a company’s qualifying R&D expenditure.

For SMEs, the R&D tax credit is calculated as 230% of the company’s qualifying R&D expenditure. This means that for every £1 spent on qualifying R&D activities, the company can claim an additional £1.30 as a tax credit.

For large companies, the R&D tax credit is calculated as 130% of the company’s qualifying R&D expenditure. This means that for every £1 spent on qualifying R&D activities, the company can claim an additional £0.30 as a tax credit.

In addition to the R&D tax credit, there is also an R&D expenditure credit (RDEC) available for large companies that carry out qualifying R&D activities. The RDEC is calculated as a percentage of the company’s qualifying R&D expenditure and is available to large companies that are not eligible for the SME R&D tax credit. The current RDEC rate is 13%.

Who is eligible for the Research and Development Tax Credit?

To be eligible for the R&D tax credit, a company must be subject to UK corporation tax and must have carried out qualifying R&D activities. Qualifying R&D activities are those that seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties.

A company can claim the R&D tax credit even if its R&D activities have been unsuccessful. The R&D tax credit is available to companies of all sizes, but the amount of relief that can be claimed depends on whether the company is an SME or a large company.

What are qualifying R&D activities?

Qualifying R&D activities are those that aim to achieve an advance in science or technology through the resolution of scientific or technological uncertainties. These activities must be systematic, investigative, and conducted for the purpose of achieving an advance in science or technology.

Examples of qualifying R&D activities include:

  • Developing new or improved products, processes, or services
  • Improving existing products, processes, or services
  • Developing new or improved materials
  • Developing new or improved software
  • Carrying out clinical trials

How to claim the Research and Development Tax Credit?

To claim the R&D tax credit, a company must submit a claim to HM Revenue and Customs (HMRC). The claim must include details of the qualifying R&D activities that have been carried out, the amount of qualifying R&D expenditure, and how the R&D tax credit has been calculated.

It is important to note that the claim must be made within two years of the end of the accounting period in which the qualifying R&D expenditure was incurred.

Conclusion

The Research and Development Tax Credit is a valuable tax incentive that can help businesses of all sizes to offset some of the costs of qualifying R&D activities. By encouraging innovation and investment in research and development, the R&D tax credit is helping to drive economic growth and competitiveness in the UK. If you think your business may be eligible for the R&D tax credit, it is worth seeking professional advice to explore your options and make the most of this valuable tax relief.