Research and Development (R&D) are essential drivers of economic growth. A vibrant economy relies on sustainable global competitiveness and support for businesses investing time and funds into R&D.
R&D tax credits, SEIS, and EIS are three ways the UK government supports business innovation.
What are R&D tax credits and how do they work?
R&D tax credits can today be claimed by a range of companies seeking to research or develop an advance in their field. Even for unsuccessful projects.
Research and Development tax credits are a UK government incentive launched to reward UK companies for funding innovation. The tax credits can be a precious source of funds for businesses to invest in expediting their R&D, hiring new personnel and ultimately scaling up their business.
Businesses in every sector of the economy, which have invested or are investing funds to develop new products, processes or services; or enhancing existing ones, may qualify for R&D tax relief.
An R&D tax credit can be claimed in the form of a payment and/or Corporation Tax reduction. Businesses claiming for the first time can typically claim R&D tax relief on their previous two completed accounting periods.
What kind of projects can claim R&D tax credits?
The work qualifying for R&D relief must be part of a specific project aimed at advancements in science or technology. Progress within social sciences or theoretical fields does not qualify.
The project needs to relate to the company’s business – either to an existing trade, or a trade intended to launch based on the results of the R&D.
To qualify for R&D relief, the project needs to meet the following criteria:
- looked for an advance in science and technology
- tried to or succeeded in overcoming uncertainty
- could not be easily worked out by a professional in the field
Advances in the field must relate to the overall industry and field of work, not just the business.
In addition, the project requires a level of complexity which a professional in the field could not have worked out with ease.
To prove scientific and/or technological uncertainty businesses need to show the uncertainty of experts at the beginning as well as the research, testing and analysis required for development. For example, in a description of the successes and failures during the project.
What types of R&D relief are available in the UK?
Different types of R&D relief are available, depending on company size and whether the project has been subcontracted or not.
SME R&D Relief
Companies can claim SME R&D relief if they operate with:
- less than 500 employees
- a turnover of under 100 million euros or a balance sheet total under 86 million euros
SME R&D relief allows companies to:
- deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, for a total deduction of 230%
- claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss
Research and Development Expenditure Credit
Large businesses can claim a Research and Development Expenditure Credit (RDEC) for their R&D projects.
SMEs and large companies who have been subcontracted for R&D work by a large organisation can also claim RDEC.
The RDEC is a tax credit at 11% of qualifying R&D expenditure up to 31 December 2017.
It has since been increased to:
- 12% from 1 January 2018 to 31 March 2020
- 13% from 1 April 2020
What else do I need to know about R&D relief?
While the number of companies filing for R&D tax credits is growing rapidly, with over 50,000 R&D claims made by SMEs last year, not all companies realise that they may be eligible to claim that R&D cash back.
R&D relief cannot just be claimed by traditional tech companies or laboratories. The company needs to demonstrate that some of that work in developing a product or project, was done with the aim of making an advance in science or technology.
The main eligible costs for R&D relief are employee costs, subcontractor costs, software, consumable items, prototyping and clinical trials volunteers.
In addition costs of subcontractors can be claimed, even if they are not in the UK.
Many companies are unaware that the project does not have to achieve commercial success to be eligible for the R&D credit. The aim of the tax incentive is after all to de-risk innovation.
What is SEIS, and EIS?
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two UK government initiatives granting private investors a significant tax break when investing in early-stage, ‘high-risk’ companies.
SEIS is focused on very early-stage companies, while EIS focuses on medium-sized startups.
SEIS allows for a 50% tax break in return for an individual investing up to £100,000 per tax year. EIS allows individual investors to invest up to £1 million per tax year, receiving a 30% tax break in return.
Most trades qualify for SEIS and EIS funding, but a number are excluded entirely, for example, those dealing in land or commodities, trades involved with banking, insurance or money-lending and more.
Funds raised must be used for qualifying business activity and solely to promote the growth and development of the company, like hiring new employees, developing the product or marketing activities.
Companies can raise up to £150,000 in SEIS funding and no more than £12 million in EIS funding. Individual investors under SEIS or EIS are not allowed to hold more than 30% of the company’s overall shares.
Do you have questions about how to claim an R&D tax credit for your business? Are you interested in SEIS and EIS funding for your business? Have a look at our services and feel free to get in touch with us.
You can book a consultation at info@acuaccounts.com or call us directly on 0203 907 9027.
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