How to determine if your business qualifies for research and development tax credits

Research and development tax credits are a financial incentive the Government offers companies to fuel innovation and progress in areas of science and technology.
There are two R&D schemes in the UK: one for SMEs and another for larger enterprises. So, does your business qualify for R&D tax relief? Read on to find out.

Understanding research and development tax credits

Research and development tax credits reward innovative companies that aim to make technical advances in their field. You can use this tax relief to reduce your corporation tax bill or claim a tax credit.

There are two main types of R&D tax relief schemes:

1. Small and medium-sized enterprise (SME) R&D relief: You can claim SME R&D tax relief if your business has fewer than 500 staff and a turnover of under 100 million euros or a balance sheet totalling 86 million euros.
2. R&D Expenditure Credit (RDEC): This is generally for larger companies, but SMEs subcontracted to do R&D work by a large company can also claim it.

Remember to include any partner and linked enterprises when determining which scheme your company can use.

Projects that count as R&D

Not every innovative project qualifies for research and development tax credits. The work must be a part of a project that aims to make a ‘technical advance’ in science or technology. It’s crucial to note that you cannot claim for projects making advances in the arts, humanities, social sciences or economics.

The rules surrounding R&D projects can be complicated – but generally speaking, they should relate to your company’s trade. Your project could be centred around devising a new product, process, or service or enhancing an existing one.

To make an R&D claim, you need to demonstrate how the project:

1. Sought to make an advance in a field: It must aim for progress in a field of science or technology, not just an internal improvement for your business.
2. Addressed scientific or technological uncertainty: You should show that the project aimed to overcome a challenge that was not easily solvable by professionals in the field.
3. Attempted to overcome the uncertainty: The project should involve research, testing and analysis, indicating a rigorous effort to resolve the technical uncertainty.

For further information on the definition of R&D for tax purposes, speak to your accountant or explore CIRD81900 of the Corporate Intangibles Research and Development Manual and the guidelines on R&D for tax purposes.

Examples of projects that qualify for R&D tax relief

Here are four examples of projects that would likely qualify for research and development tax credits, assuming the business itself qualifies:

1. Food industry: A food production company invests in research and development to create a new line of plant-based meat alternatives. The R&D project would aim to expand their product range to include more vegetarian and vegan options and expand industry knowledge overall.
2. Software development: A software development company is researching and developing advanced machine learning algorithms to improve its existing customer relationship management (CRM) system. The outcome of the project will add to industry knowledge as well as enhance a product they already offer.
3. Agriculture: An agricultural company is genetically modifying seeds to increase its crop yield and resistance to pests. The results of the project could benefit both the company and the agricultural industry as a whole.
4. Renewable energy: A renewable energy firm is investing in R&D to improve the efficiency of their solar panels. The project could lead to a more efficient product and strengthen their market position – but it would also widen industry knowledge.

In any of these scenarios, there must be uncertainty about how to overcome the problem. That means the outcome of the project cannot be easily deducted by a professional in the field.

Furthermore, the R&D project must be conducted by ‘competent professionals’ with industry expertise.

How to apply for R&D tax credits

Applying for research and development tax credits involves meticulously documenting your project’s objectives, R&D costs and how it fulfils the criteria set out by the scheme.

As of 8 August 2023, claimants must also submit an additional information form (AIF) to support their claim.

When filling out the AIF, you must clearly demonstrate how your project aligns with the qualifying criteria, detailing the uncertainties it addresses and the advancements it aims to achieve. While originally introduced to reduce widespread fraud within the SME R&D scheme, the form also makes it harder for businesses to minimise their corporation tax liabilities.

James Scott Accounts can play a crucial role in this process. With our expertise in corporate tax planning and R&D claims, we can guide you through making your claim, offer professional advice and take on much of the administrative burden for you.

Our experience working with R&D-intensive industries like technology and manufacturing means we can also offer sector-specific advice and support tailored to your business.

We can help identify qualifying R&D activities, calculate eligible expenses and prepare and submit your claim to maximise the potential benefits.

Get in touch with us to discuss your business’s eligibility for research and development tax credits.