Navigating the Complexities of R&D Tax Credit Qualifications

The UK Government implemented the R&D Tax Credits in 2000 to encourage companies to invest more in research and development. The government believes that innovation is beneficial to the economy, hence, the best way for companies to respond is to offer an incentive.

To put it in practice, small and medium businesses that are either profit-making or loss-making can earn up to 33% back on the amount of capital spent on research and development. On the other hand, large companies can get up to 10% of their R&D costs refunded. The credit is applied as a corporation tax refund or a deduction against payable corporate taxes at the end of the fiscal year. In turn, the company can spend the credit on hiring more employees, buying equipment, or paying dividends or loans.

What qualifies as an R&D expenditure?

HRMC has detailed criteria on what qualifies as R&D expenditure. A project qualifies for a tax credit if it constitutes an advance in science and technology. This is further defined as an improvement in knowledge and capability in a certain technical field. How do you best understand this definition? Here are some examples of what would probably qualify or not qualify for R&D tax credit.

• An online logistics platform that sources fresh produce from across Europe and automates the calculation of the price and location for delivery would probably qualify.
• A platform that enables people to upload videos online where image recognition software is used to identify and tag videos to make then easily searchable would probably qualify.
• A customised website with a specialised contact form where specific information related to the business can be gathered from respondents would probably not qualify.
• The development of new materials that can be used for technical applications would probably qualify.

The scale and performance of the innovation can also be a qualifying factor. Aside from this, the cost of the innovation is also a factor for qualification. Here are some additional guidelines:

• You have a UK based company
• Your company must have spent money in developing a technology.
• The money should have been spent on: Staff via PAYE, daily paid external contractors, software licenses, materials that were used in the development, and subcontractor costs.

Once you have identified specific expenditures that qualify for an R&D tax credit, you can use an R&D tax credit calculator to get an idea of how much you can expect in return. Certainly, the easiest way to file an R&D tax return is to hire a specialist firm. They have the expertise and the tools to navigate through all the complexities involved with qualifications as well as the requirements you need to submit. However, if you don’t want to spend money and have the time to do it yourself, you can certainly find available online resources to guide you through the process.

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