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R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by reducing a company's tax bill by an amount equal to a percentage of the company’s allowable R&D expenditure.
A company can only claim R&D tax credits if it is liable for Corporation Tax but loss-making companies can benefit as can companies that undertake qualifying R&D expenditure on a project that ultimately fails.
The Two Ways to Claim Relief
There are two schemes for claiming relief for R&D expenditure. The schemes are known as;
- the Small or Medium-sized Enterprise (SME) Scheme for smaller companies
- and the Research Development Expenditure Credit (RDEC) scheme for large companies.
A company can usually make a claim under the more generous SME scheme if they have less than 500 staff and a turnover of under €100m or a balance sheet total under €86m. However, you need to take care if a company is:
- a linked enterprise
- acting as a subcontractor
- or has received certain grants
This can affect your entitlement to SME status. Companies that do not qualify as an SME can use the RDEC scheme for larger companies.
SMEs can claim R&D tax credits of 230% on qualifying expenditure. This effectively means that for every £100 a company spends on qualifying R&D, they can deduct £230 from their profits when calculating profits chargeable to corporation tax.
By contrast, large companies can claim an enhanced Corporation Tax deduction using the RDEC. The RDEC rate is currently 12%. Loss-making companies can also claim relief for qualifying R&D expenditure.
What Constitutes R&D?
The rules as to what qualifies for R&D tax relief are complex. In general, however, a project qualifies as R&D if:
- It seeks to achieve an advance in science or technology.
- The research is relevant to the business.
- The business is of a trading nature as distinct from someone working in a profession or vocation.
This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way. However, pure product development in itself does not qualify for R&D relief.
Some examples of qualifying activities include software development, engineering design, new construction techniques, bio-energy, cleantech, agri-food and life, and health sciences.