Research, Development and Tax Credits

Research and development is one of the UK Governments key drivers for productivity growth. High levels of R&D, support strong and stable growth. The Government’s target is to raise the level of R&D investment in the UK as a whole to 2.4% of GDP by 2027.

The aim of the Research and Development Tax Credits scheme is to encourage greater investment in innovation in the UK.

The R&D Tax Credit scheme was introduced in 2000 for SME's and 2002 for larger companies. The SME scheme was significantly enhanced 1st August 2008. 1st April 2011, 1st April 2012 and 1st April 2014 and the Large company scheme (now labelled The Research and Development Expenditure Credit or RDEC) on the 1st April 2008, 1st April 2013, 1st April 2015, 1st January 2018 and 1st April 2020. The SME scheme allows for qualifying Research and Development costs to be enhanced for company tax computation purposes. From the 1st August 2015 every £1 spent by an SME can be treated as if the company had spent £2.30 for tax purposes. Whereas, the RDEC scheme generates an above the line grant equal to 13% of the qualifying expenditure.

To qualify; R&D must be part of a project or planned objective, it must seek to increase the overall stock of knowledge or capability in a particular field, it must seek to resolve scientific or system uncertainty. The caveat that must be borne in mind when reading this paragraph is "within your business". R&D includes gaining knowledge that already exists elsewhere, but which is "trade secret" and therefore unavailable to your business, therefore, to gain it, you must re-invent it.

Let's take an example of a company spending £100,000 per annum on developing new products (staff costs, materials, consumables). If the company is a Profit Maker it could save £24,700 in Corporation Tax (24.7% of spend), if a Break-Even business it could receive a £18,850 Payable R&D Tax Credit (just under 19% of spend in Cash) and if the business is losing £100,000 or more it could receive a £33,350 Payable R&D Tax Credit (33.35% of spend in Cash).

From 1st August 2008 the definition of a Large company was doubled to have 500 or more employees with either turnover at €100million or more or a balance sheet totalling €86million or more.

One of the most interesting asides to the evolving UK R&D legislation was the introduction of the RDEC, primarily introduced for the large company or organisation. An SME can also benefit from the RDEC scheme if that SME is being sub-contracted R&D by a large company or organisation, or if that SME is in receipt of a grant to undertake R&D.

Many OCL SME clients receive tax benefits from both the SME and the RDEC schemes – ask us how?