Research & Development Tax Credits

lightbulbR&D tax credits are a company tax relief for investment into research and development projects. The R&D credit goes up to 175% from April 2008 (prior to this the relief was 150%)

What does this mean? well simply if you spend £100,000 on qualifying R&D you get tax relief on £175,000.

For companies not making profits, it is possible to use the relief against the PAYE tax to create a cash refund.

What R&D activity qualifies for the incentive?

The definition of qualifying R&D activity is wide-ranging and sometimes challenging to apply in practice. HM Revenue & Customs (HMRC) and the Department of Trade and Industry (DTI) have issued guidelines to help companies identify their eligible activity.

The activity has to:

  • constitute an advance in the field; and
  • resolve scientific or technological uncertainty.

And it is worth noting the following points:

  • A project does not have to result in a success to qualify for the incentive.
  • SSAP13 disclosure is not an essential prerequisite for a claim.
  • R&D is not just done in laboratories: for example,engineering can qualify, as can back-office software infrastructure projects or improvements to manufacturing processes.
  • R&D activity need not be undertaken in the UK to qualify.

What R&D costs are eligible for the incentive?

There are four main categories:

  • Staffing costs – salary, national insurance costs, pension contributions (and benefits in kind, for a limited period).
  • Consumable and transformable materials – materials consumed/transformed in the R&D process, software used directly in the R&D and limited overhead payments for power, fuel and water.
  • Externally provided workers – agency staff and workers provided by group employment companies.
  • Payments to qualifying bodies/contributions to independent R&D efforts.