Everything you need to know about the UK’s research & development tax credits regime
If your company is involved in developing innovative science or technology products or services, it could be eligible to claim Research and Development (“R&D”) tax credits. These tax credits can lessen the company’s Corporation tax (“CT”) bill, encouraging further investment in research and development and ultimately, helping your business to grow.
What is a research and development tax credit?
Research and Development tax credits are a tax incentive for companies which produce innovative new products, processes, or services, or who enhance existing ones in innovative ways. Research and Development tax credits can either result in an extra 86% of their R&D costs in the financial statements being deducted for CT, thereby radically reducing a company’s CT bill or, where tax losses are being generated, result in a CT rebate equal to 10% of the CT losses “surrendered”.
Research and development tax credits reward innovation
The purpose of R&D Tax Credits is to reward UK companies for innovation. They are a government incentive to help inventive companies increase in size and productivity in a competitive global marketplace. In a world increasingly driven by fast-moving and sometimes life-changing technologies, the UK economy is strengthened by businesses that can make technological advances in the fields of science, medicine, telecommunications, software, and other areas of innovation. Additionally, encouraging R&D in the business environment helps scientific and technological research, aiding the overall productive capabilities of the UK.
How do R&D tax credits work?
If a company spends money on innovation, it should be eligible to claim R&D Tax Credits in respect of certain categories of expenditure, including UK R&D subcontractor costs. There are a number of detailed qualifying conditions and typically, an R&D tax credits report is lodged with HMRC to support the claim. If your company has not claimed R&D Tax Credits previously, you may be able to claim R&D tax credit relief for the last two accounting years, resulting in CT savings.
What counts as innovation?
Research and development is possible in every business sector, so there is a wide range of possibilities for eligibility. To qualify, you should be able to demonstrate that your business has spent money to make advances in science and technology. The work must relate to your company's existing trading niche, or one that you are planning to enter, based on your R&D efforts.
The advance your company achieves must be of genuinely innovative in the market and not just for your own business. That means that simply reusing an existing technology in a new sector does not count as an innovation for tax purposes. There are other restrictions relating to the location and type of research that are eligible. For example, expenditure relating to advances in Social Sciences is not qualifying expenditure for research and development tax credits, such as Economics. Additionally, the work must have immediate practical application, so innovations in theoretical fields may not qualify.
Is my company eligible?
To be eligible for R&D credits, you must be a UK private or public limited company. You can make different types of claims depending on the size of your business.
To discover more about UK Research and Development tax credits and find out if your company is eligible, please contact Arnold Hill & Co LLP today to book your free consultation.
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