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R&D Tax Credits
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The UK Government introduced research and development tax credit schemes (R&D schemes) in the year 2000 to encourage scientific and technological innovation within the UK. A range of incentives are available to enhance tax relief, or provide cash credits, to businesses of all sizes that are involved in innovation. Deloitte pioneered the hiring of scientists and engineers to advise businesses on R&D schemes.
The UK Government is committed to making the UK a competitive place to innovate and grow. R&D schemes allow businesses that carry out qualifying R&D to mitigate their tax liability where businesses are liable for corporation tax (CT) or, in some circumstances, businesses may receive a payable tax credit. The value of these incentives and mechanisms varies depending on the size of the business.
What is R&D for Tax purposes?
In the UK, R&D for tax purposes is defined by the Department for Business, Energy and Industrial Strategy (formerly Business Innovation & Skills) in their guidelines. Broadly, the guidelines state that in order for a project to qualify for the various R&D schemes, the project activities should meet the following two key criteria:
The Department’s guidelines are available in full here.
Types of R&D Schemes
A “super deduction” may be available for SMEs to mitigate their tax liabilities or, if loss- making, a cash credit may be available. Under this regime, a claim must be made within 2 years from the end of the accounting period to which it relates.
130% additional tax deduction for qualifying technological expenditure resulting in reduced tax payable (up to 25% of qualifying expenditure)
Surrender of losses in return for payable tax credit (up to 33% of qualifying expenditure)
For accounting periods beginning on or after 1 April 2021, the payable R&D tax credit that a loss-making SME can receive will be capped at £20,000 plus three times the amount paid in respect of PAYE and Class 1 NIC liabilities. The cap therefore does not apply for companies whose payable credits is not more than £20,000. Companies are also exempt from the cap where the following two part test is met: the claimant company’s employees are creating, preparing to create or actively managing IP; and the spend on connected party resources does not exceed 15% of the company’s qualifying R&D expenditure for an accounting period.
SMEs will be able to claim under the RDEC scheme for large companies if they do R&D which is subcontracted to them or grant funded.
Is your business an SME?
The EU Definition of a Small or Medium Sized Enterprise (SME*) consists of the following:
*Note that partner or linked enterprises must also be included in the test
Learn more about the SME scheme and how we help companies in the Private Market and the start-up industry - Download our SME flyer
The Research and Development Expenditure Credit (RDEC) scheme was introduced in the Finance Act 2013. It provides a tax credit which can be used to reduce corporation tax payable or if a company has no corporation tax liability a cash credit can be claimed. Under this regime, a claim must be made within 2 years from the end of the accounting period to which it relates.
Taxable credit at 12% of qualifying expenditure, and at 13% from 1 April 2020.
Companies with no CT liability will benefit from RDEC through a cash payment. The payable credit is limited to the company’s PAYE/NIC liabilities of the staff engaged in qualifying activities in the accounting period.
Who can claim?
- A large company is one that does not qualify as an SME
- Large companies and SMEs that have been subcontracted to conduct R&D or that are grant funded
- Large companies can claim expenditure subcontracted to them by other large companies
Learn more about how the RDEC scheme works and examples of how we have assisted our clients - Download RDEC flyer
Companies can also benefit from expenditure where they incur capital expenditure associated with R&D.
The RDA scheme provides a 100% deduction for capital expenditure in the year the costs were incurred. This can improve cash flow significantly compared with other capital allowances, which give relief over much longer periods (or applying the appropriate depreciation policies).
- Available for both large companies and SMEs
- Broad range of qualifying cost categories
Learn more about various other schemes available for capitalised expenditure from our dedicated capital allowances page.
Qualifying R&D Cost Categories
There are 5 key categories of costs that can be claimed for R&D Tax claims under the various regimes. The following diagram highlights an overview of these key cost categories:
Companies of all sizes can secure significant cash benefits from their innovation activities through the R&D tax relief. Making the claim is a compliance matter, but preparing a claim correctly requires a thorough understanding of the industry challenges and the underlying technology. To help our clients benefit from this regime, Deloitte has a dedicated team of senior engineers, scientists, IT and software specialists experienced in a wide range of industry sectors.
How can we help?
Identifying qualifying R&D activities for the R&D tax credit can be challenging for both large and small businesses. This is due to the underlying technicalities and judgment needed to apply the definition coupled with HMRC’s increasing approach of requesting high quality scientific and technological reports.
Our advice can help to take the complexity out of making R&D claims and find value by looking deep into your business, using a data driven and technology enabled approach. This can help our clients to get more value out of the R&D expenditure credit against their R&D investment.
Find out more about our Gi3 Technology Solutions
The award-winning Deloitte Gi3 practice is one of the largest and most experienced teams in the UK and globally, with a coordinated national and international presence consisting of skilled professionals in finance, tax, patents, technology, engineering and various scientific fields. We have extensive experience of advising on R&D schemes and in preparing R&D claims for SMEs and large companies across a variety of industries.
Find out more about why Deloitte is considered one of the leaders in the industry.