Insight

How to know if your organisation could be eligible for R&D tax credits

Discover what activities might make your organisation eligible to claim R&D tax credits, from qualifying activities and industries to qualifying expenditure.
How to know if your organisation could be eligible for R&D tax credits

If you are a UK business owner, undertaking activities involving a field of science or technology, there is a good chance your company could be eligible for research and development tax credits. But the eligibility requirements can be complicated to understand.

This article will explore some of the potential ways that UK companies might be eligible for R&D tax credits. If you recognise some of the characteristics from these indicative examples in your own business activities , it's possible that your organisation could benefit from this valuable government incentive!

So, what are R&D tax credits?

This UK government incentive is a form of tax relief for qualifying UK companies undertaking activities in fields of science or technology to improve existing processes, materials, products, devices or services, or create entirely new ones. If your company undertakes activities that fall under this umbrella, you could be eligible! 

Tackling a problem through making scientific or technological changes of significance for your industry, especially if the solution to an issue has previously gone unsolved is a key hallmark pointing towards eligibility. If work to find a solution is managed as a project or series of projects, then there could be opportunities to claim R&D tax credits.

Research and development tax credits are available for small businesses and large companies alike, so long as your projects centre around technological uncertainties. 

How to know if you're eligible for R&D tax credits

For a project to qualify as R&D, you will have to set out to achieve an 'advance' in a field of science or technology relevant to your industry as a whole, not just an advance in your company’s own state of knowledge or capability.

Importantly, if the advance has already been achieved but the information as to how this was achieved is not in the public domain, your project to achieve the same could still potentially qualify as R&D.

It's also critical to note that it doesn’t matter if your R&D projects aren't always a success. Even if your project is unsuccessful, if it sets out to achieve something new or appreciably improve something, you can still make a claim, despite not completing a project from idea to launch. Research from Imperial College London shows that, on average, 33% of R&D projects fail or are discontinued. It is possible to claim R&D tax credits for failed projects!

R&D project timeline: idea, planning, design, build, test, launch
On average, 67% of R&D projects are completed

To help you figure out if your organisation might be eligible for R&D tax credits, I’m exploring some key hallmarks that are indicative of qualifying R&D taking place, which you may find relatable to your own project work...

Applying scientific or technological principles relevant to your industry

Applying scientific or technological principles relevant to your industry to expand knowledge and capabilities in these fields (for your industry as a whole) is indicative that you might be carrying out qualifying R&D for tax purposes. This means you are doing something like developing new processes, materials, products, devices or services through making scientific or technological changes.

But it's not always 'new' that ticks this box! Improving existing processes, materials, products, devices or services is also an eligible activity, as is copying with a difference.

Certain industries lend themselves to this aspect better than others, but the possibilities are endless when it comes to how a company might seek to apply scientific or technological principles in search of tangible or intangible improvements to a product, material, process, device or service.

Science and technology in software

As an example, if your company creates or adapts software programmes, solves incompatibilities with other software programmes, or develops new software that allows for new functionality, this could make you eligible for R&D tax credit opportunities.

The work could centre around building a completely new software programme or enhancing an existing solution - both purposes are equally valid for R&D.

Science and technology in manufacturing

Companies in the manufacturing sector often rely on R&D to improve or create processes, products or materials. For example, a manufacturing company could work on developing improvements to yield, repeatability, scalability, pasteurisation effectiveness, energy efficiencies and so on, through making technological changes to production lines and related equipment.

Rocket blast-off
The scope of R&D activities is far reaching

Science and technology in engineering

R&D tax credits are not intended to only reward rocket science or “blue sky” thinking. For many businesses in the engineering sector, R&D is present in problem solving work, applying scientific or technological principles to expand knowledge and capabilities in these areas to achieve a business goal.

As an example, let’s take a plant and equipment engineering business. They could be eligible to claim R&D tax credits for work seeking improvements to strength, size, reach, speed, compact packaging and much more, the scope is wide! 

Science and technology in pharmaceuticals

The industry most invested in R&D.

Researching, testing, trialling and manufacturing new drugs is highly likely to meet eligibility criteria since all disciplines contributing to the creation of new medicines seek to evolve scientific knowledge and may rely on advancements in supporting technologies too.

Financial outlays for R&D activities 

Another indicator that you may be able to claim R&D tax credits is that your company has spent money to fund key development activities from defining the scientific or technological development specifications, through iterative phases of design/development and testing, up to the point where you have reached a solution that meets your project’s development criteria. Remember though, that success is not a requirement and projects that fail at any point within the development life cycle are still eligible for this tax relief.

Ask yourself, does my company have significant expenses relating to necessary resources, consumables and staff? 

The UK government wants companies who are willing to invest financially in their R&D projects to be able to recover these outlays and receive a further cash boost based on what has been spent:

  • Staff salaries, employer class 1 National Insurance Contributions and employer pension contributions - work must be carried out by qualified people who are experienced in their field of study or research.
  • The reimbursement of employee expenses might also qualify where certain conditions are met - for example, travel expenses associated with your R&D activity.
  • Borrowing staff from group companies - again, work must be carried out by qualified experts but these employees can be transferred between companies who are part of a group.
  • Payments to third parties possessing relevant expertise for your work - you do not have to directly employ staff for your research and development activities, you may outsource work to qualified third parties.
  • Additional labour resource via agencies or freelancers to work with in-house staff - you may have a combination of directly employed staff, freelancers and agency workers; you can claim for all of these.
  • Software licensing fees - subscriptions and running costs associated with software that's required for your R&D activities is an eligible expense to claim tax credits on.
  • Utilities (heat, light and power) - running costs associated with a physical workplace can be factored into your R&D tax claim, for example, electricity costs to power machinery used in your R&D activities.
  • Consumables - the cost of materials and equipment used in your R&D process can be claimed for. 
Team working together around a laptop
Consider expenses for both directly employed staff and subcontractors

Your business may undertake qualifying R&D in science or technology fields on an ‘ongoing’ basis. This means you may be able to make claims for R&D tax credits on an annual basis to receive a regular source of funding to reinvest in your business.

Your organisation will need to demonstrate how the expenditure incurred relates to the qualifying activities within the project work undertaken. There is a requirement to record time spent working towards project objectives and also link other types of qualifying expenditure to specific project work.

How to be sure your organisation meets R&D tax credits criteria

If you're not sure whether your business qualifies, always seek professional advice from a chartered tax adviser. They'll help you determine whether or not your business meets the criteria for R&D tax credits. This broadly involves the consideration of the nature and purpose of your work, how that work came about, related expenditure and a number of other factors that could influence a company’s eligibility to claim, or the relevant R&D tax credit scheme a company is entitled to claim under.

There are lots of intricacies involved in R&D tax credits and it can be difficult to keep track of all the rules and regulations - but if you do recognise some (or all) of the indicators noted in this article in your own work, then you might be able to benefit from this UK government incentive designed to encourage companies in every industry sector to invest more money into development projects that have a positive impact on their industry's future success.

If you're ready to discuss your company's R&D activities or just want to find out if you should pursue this incentive, book a call with me to explore the possibility for your company to claim and where possible, estimate the potential financial benefit available.

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