R&D (Research and Development) is the process of acquiring new knowledge through innovation. Basically, in business it is the activity companies carry out in order to develop or create new products, processes or services, as well as improving on those which already exist. With this development comes risks and additional finances, creating uncertainty in relation to testing the boundaries of technology as well as achieving what was set out in practical terms.
R&D is a key process for businesses who wish to remain competitive, generate profit and be at the top of their respective industries. As well as this, R&D can be claimed as a corporation tax relief, potentially saving businesses huge sums of money. R&D reliefs support companies that work on innovative projects in science and technology and can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
Often many people think of R&D is for people in white lab coats, however this just isn’t the case. The UK government have recently announced plans to boost private sector investment in R&D across the whole of the UK and create the right conditions for all businesses to innovate so they have the confidence to do so. This will be under the new Innovation Strategy, set out by Business Secretary Kwasi Kwarteng, aiming to cement the UK’s position as a world-leader in science, research and innovation.
We analyse how businesses can use R&D to further their business, and potentially their industry, whilst gaining some valuable incentives which could enhance their profits and reputation.
What Is R&D (Research & Development) & What Does It Cover?
Research & Development (R&D) is the activity in which a business uses to further their innovation into a specific product, service, system, or an improvement to any of these. The work that qualifies for R&D relief must be part of a specific project to make an advancement in science or technology. It cannot be an advancement within a social science, such as economics or a theoretical field such as pure maths.
There are two different types of R&D relief, which considers the size of the company and whether the project has been subcontracted or not. These are SME R&D Relief and Research & Development Expenditure Credit (RDEC).
You can claim SME R&D relief if you’re an SME with:
- less than 500 staff
- a turnover of under 100 million euros or a balance sheet total under 86 million euros
- You may need to include linked companies and partnerships when you work out if you’re a SME.
SME R&D relief allows companies to:
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. It can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.
The RDEC is a tax credit, it was 11% of your qualifying R&D expenditure up to 31 December 2017. It was increased to:
- 12% from 1 January 2018 to 31 March 2020
- 13% from 1 April 2020
What Is The Government’s New Innovation Strategy & How Will It Affect R&D (Research & Development)?
With plans to put the UK at the forefront of R&D globally, the UK is committed to increasing annual public investment on R&D to a record £22 billion. The private sector also plays a key role in boosting spending on R&D, which is an essential part of the country’s future prosperity and key to achieving key domestic priorities. This ranges from tackling climate change and boosting productivity, to levelling up opportunities across the UK and supporting businesses out of the pandemic.
Through the Innovation Strategy the government will:
- Increase annual public investment on R&D to a record £22 billion.
- Ensure government procurement is proactive and supportive, providing a route to market for innovative new products and services.
- Consult on how regulation can ensure that the UK is well-placed to extract the best value from innovation.
- Commission the Regulatory Horizons Council to consider how best to support innovation through regulation, including looking whether there are a set of high-level guiding principles for regulation that may apply broadly to any sector of innovation.
- Introduce new High Potential Individual and Scale-up visa routes and revitalise the innovator route to attract and retain high-skilled, globally mobile innovation talent.
- Undertake an independent review to assess landscape of UK organisations undertaking all forms of research, development and innovation.
- Reduce complexity for innovative companies by developing an online finance and innovation hub between Innovate UK and the British Business Bank within the next 12 months.
- Expand IP education programme for researchers and launch International IP Services to bolster innovative companies’ and researchers’ ability to confidently collaborate, export and invest overseas.
- Publishing of a new action plan on ‘Standards for the Fourth Industrial Revolution’, promoting standards that enable innovation to flourish.
- Invest £200 million through the British Business Bank’s Life Sciences Investment Programme to target the growth-stage funding gap faced by UK life science companies.
- Support 30,000 senior managers of small and medium sized businesses through Help to Grow: Management to boost their business’s performance, resilience, and long-term growth.
Due to the pandemic, there was a decline in business R&D investment, skills gaps and the need for pro-enterprise regulatory environment to spur innovation. To combat this, the government will specify ‘innovation missions’ to set clear direction, urgency and pace on the issues confronting the UK that will be tackled with the private sector in the coming years. These will be determined by the new National Science and Technology Council and supported by the Office for Science and Technology Strategy. The government is also outlining 7 strategic technologies to prioritise and build on the UK’s existing R&D strengths, including clean technologies, robotics, genomics and AI, where the UK has a globally competitive advantage and industrial strength.
Business Secretary, Kwasi Kwarteng, states, “Through this long-term plan, we want to rekindle our country’s flame of innovation and discovery, helping businesses to seize the vast opportunities that innovation can bring. If we get this right, we can build the foundations for the new industries of tomorrow, and ensure British firms are at the front of the pack to turn world-leading science into new products and services that are successful in international markets.”
How To Apply For R&D (Research & Development) Tax Reliefs?
You can make a claim for R&D relief by entering your enhanced expenditure into the full Company Tax Return form (CT600) before making the claim through HMRC’s dedicated online system. To calculate your enhanced expenditure:
- Work out the costs that were directly attributable to R&D.
- Reduce any subcontractor or external staff provider payments to 65% of the original cost.
- Add all costs together.
- Multiply the figure by 130% to get the additional deduction to put in to your tax computations.
- Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.
It will help your claim if you give us a short summary that explains how your project:
- Looked for an advancement in science or technology and aimed to achieve this advance
- Had to overcome scientific or technological uncertainty
- Overcame this uncertainty
- Could not easily be worked out by a professional in the field
You’ll also need:
- The start and end dates of the accounting period relating to the R&D activity – these should be the same dates as the period covered by your CT600 return
- Your 10-digit company unique tax reference (UTR) number
- The total amount of tax relief you’re claiming
- A breakdown of your qualifying R&D costs
- Your unrelieved trading loss for the claim period
If you’ve claimed tax relief on:
- One to 3 projects, you must include details of all projects
- 4 or more projects, you must include detailed descriptions on at least 3 to a maximum of 10 projects which between them cover 50% or more of your total qualifying R&D costs
We hope this has outlined to you exactly what R&D is and whether or not your business can look to get involved. If you require any more information on any government schemes or tax reliefs, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.