In the competitive landscape of the UK's economy, fostering innovation and technological advancement is a Government priority, particularly for deep-tech businesses. For startups and small to medium-sized enterprises (SMEs) that are pushing the boundaries of innovation, the UK government's Research and Development (R&D) tax relief schemes can serve as a very useful source of funding. These incentives are designed to encourage and reward companies that invest in pioneering new products, processes, or services. This article aims to demystify Research and Development (R&D) tax reliefs, highlighting their benefits, eligibility criteria, and how businesses can navigate the application process to support their innovative projects.
If you're looking for information on the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) click here.
What are Research & Development Tax Reliefs?
R&D tax reliefs allow companies to reduce their tax bill or, in some cases, receive a cash payment from HM Revenue and Customs (HMRC) by claiming allowable R&D expenditure. There are two main schemes through which businesses can claim these reliefs:
This is available for SMEs with fewer than 500 employees and either a turnover under €100 million or a balance sheet under €86 million. It offers up to 33 pence for every £1 of qualifying R&D expenditure, making it a significant incentive.
Aimed at larger companies, or SMEs subcontracted to do R&D work by large firms, RDEC allows companies to claim an expenditure credit for working on their R&D projects. This credit is treated as “above the line”, meaning it is accounted for as income, therefore impacting the company's corporation tax position.
What Qualifies as R&D?
Understanding what qualifies as R&D is crucial. HMRC's definition focuses on projects that seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. In simpler terms, if your project aims to create new processes, products, or services, or improve existing ones through technological advances, it may qualify.
The Benefits of R&D Tax Reliefs
There are several benefits of R&D tax reliefs, not just for financial incentives, but also fostering a culture of innovation within the UK's business sector. Key benefits include:
